Bank on the fintech finance revolution
Why these start-ups are challenging the old guard
Breathe a sigh of relief: Britain’s banks seem to be in a healthy state and they are once more returning cash to shareholders by paying dividends and buying back shares.
Private investors will be gratified by this news, which is proof that pandemic anxiety is receding. But some may also be wondering whether this is as good as it gets.
Fintechs, the new breed of challenger digital institution, are snapping at the heels of the mainstream banks – Barclays, hSBC, Lloyds and Natwest – whose legacy It systems make innovation expensive.
edward Firth of broker KBW says that the annual cost of operating a customer’s account at one of the traditional names is £150£200. at Starling, the challenger bank with its cloud-based systems, it is about £57.
‘the incumbents face a multiyear challenge that only looks set to get worse,’ he says.
Such concerns have been heightened by this month’s stock market debut of Wise, the money transfer group that allows customers to bypass the banks. Its shares have risen from 800p to 981p, highlighting the view that fintechs are the future.
Competition is coming from another source for the UK banks. US giant JP Morgan Chase has snapped up the British roboadviser Nutmeg and may also try to sell home loans here.
John Cronin of broker Goodbody
is among those who believe that a challenger could break into the mortgage business where Lloyds, owner of halifax, controls 20pc.
the returns from this lending can be attractive – but only if costs are kept low. anyone with a portfolio packed with traditional bank stocks may now be alarmed.
this would be an overreaction, given the huge market share still held by the high Street names and the inertia of account holders (idleness, not love keeps us faithful). But monitoring the possibilities for diversification into fintech would still be useful.
as Giles Worthington of Sanlam, the fund manager, says: ‘Catastrophe is not coming tomorrow.’
But the high Street names are being ‘disintermediated’ with rivals making inroads into profitable parts of the banking business, such as credit cards and foreign exchange. ‘Your bank should know more about you than anyone on the planet,’ says Worthington.
Problem is, the traditional banks’ systems (bits of which were built in the 1970s) impede the use of their precious customer data to sell more products.
Newcomers, by contrast, exploit their knowledge of customers with ease. But what do we know about these interlopers? When will it be possible to invest in them? and how risky are they?
Many investors woke up to the fintech threat when it was revealed this month that revolut, a UK digital bank founded in 2015, was valued at £24bn following the injection of finance.
T hIS equals the £24bn market value of Natwest, a group that includes the 300-year old royal Bank of Scotland. revolut has no immediate plans for a flotation. however, Stripe, the Californian payments processing giant, is said to be closer to a float on Wall Street.
this business, started 11 years ago by Irish brothers John and Patrick Collison and with former Bank of england governor Mark Carney on the board, could be worth as much as £72bn.
that is exciting for holders of Baillie Gifford’s US Growth and Scottish Mortgage trusts, which have stakes. It is expected that Klarna, the £33bn Swedish company, will go public at some point.
Set up in 2005, it has 90m users worldwide, with 14m in the UK. Klarna provides BNPL (buy now, pay later), which allows shoppers to spread the cost of purchases and is an alternative to credit cards. even apple would like to break into this lucrative area, which is growing at 39pc a year in the UK, although regulation may slow this.
Starling arrived on the scene in 2017, but already has 2.4m current accounts. this week it acquired a mortgage lender and confirmed its intention to float in late 2022 or early 2023. Unlike some other fintechs, Starling is profitable. Its backers include Goldman Sachs and the Chrysalis investment trust, which also owns a slice of Klarna.
as an investor in Scottish Mortgage, I am taking a bet on the fintech incursion. But I do question some of the excitement. Venture capitalists are pouring money into the industry. Yet it’s uncertain how some of these start-ups will earn revenue, let alone be profitable.
against this background, it’s worth noting that the consensus of analysts rate Barclays and Lloyds a buy and hSBC and Natwest a hold. If you think that US banks are adapting slightly better to the fintech incursion, the Liontrust Global Dividend Fund holds JP Morgan Chase, an institution which can trace its roots back to 1799.