The banking sector has been thrown into the spotlight this year, with the demise of Silicon Valley Bank and Credit Suisse. And in early October, Metro Bank responded to “press speculation regarding a potential capital raise”, saying that the company was considering how best to enhance its capital resources.
Three days later, Metro Bank announced it had secured a £325mn capital raise and £600mn debt refinancing package. Its announcement dated October 8 said that “current capital levels constrain the company’s ability to grow lending balances significantly in the near term”.
But does Metro Bank’s capital package indicate wider issues in challenger banks’ business models?
The individual institutions within the challenger bank cohort are all quite different, says Simon Kent, global head of financial services at Kearney, a management consulting firm.
“Some of those challenger banks are performing extremely well. Their balance sheets are typically less than £20bn, but they’re in a very specific niche where their proposition is differentiating, and they're able to succeed and to thrive.
“Those challenger banks that are between the £20bn to £100bn in assets space have got many more challenges, because they are large by their very nature. And they are, in a number of cases, providing a similar product set to the big six, operating in the same spaces as the big six. So they’re having to ‘take the market’, not ‘make the market’.”
Metro Bank: total assets
Jun 30 2023 | Dec 31 2022 | Jun 30 2022 | |
Total assets (£mn) | £21,747 | £22,119 | £22,566 |
Source: Metro Bank Holdings PLC Trading Update H1 2023 | |||
Kent also says that successful challengers have found “niches and opportunities” outside of where the big UK clearing banks play, and that sometimes those niches are more difficult for the large clearing banks to deal with at scale.
“In a number of cases, the clearing banks have had to improve their proposition, customer experience and user experience, driven by the advances that the challenger banks have made.
“It’s fair to say that delta is becoming much smaller now, and therefore the challenger banks need to have that differentiated opposition in a niche, where they can operate outside of where the big six find it easy.”
Longer opening hours, seven days a week
While its competitors reduce their branch networks, Metro Bank plans to open more. Its branches also have longer opening hours, and open on Sundays.
“Metro Bank’s business model is based on excellent branch-based customer service,” says Alper Kara, professor of banking and finance at Brunel University.
“Many consumers value the choice of visiting a branch and the human touch. However, in an environment where even the big four diversify their business by offering more digital banking solutions and reducing branch presence, relying on such a labour-intensive business model may be challenging.
“The key question here is whether the demand for branch-based banking services is still large enough for Metro Bank to carve a niche, in order to sustain its business model and grow.”
Mazars’ head of UK financial services, Gregory Marchat, agrees that challenger banks are a necessity in the banking landscape.
“They bring customer-centricity and modernity, elements often lacking in traditional banks. They appeal to the younger customers who see them as a real alternative to the banks that have been there forever.”
