How worried should established banks be about new competitors? The huge increase in Fintech investment in the last few years is one indicator that competition is growing and will continue to grow. Many of these new companies are actually going to be suppliers to the industry rather than competitors but there are a large number who are targeting the core business of the banks.
However, ask any venture capitalist and they will tell you that the chances of success for a start-up are very low. Even those which succeed will take several years to become significant players. A good case example is Lending Club which was one of the first P2P lenders, launching in 2008. In 2014 the company had a successful IPO valued at around $7bn. In only one year, 2013, was the company able to report a profit. The market value as at December 2016 is around $2bn.
Most of the new digital only banks have not yet had a significant impact on the markets in which they compete. There have been innovative cases like Zuno in the Czech Republic, but this operation was put up for sale by its parent Raiffiesen Bank International and is relatively small. In the United States, the mobile centric bank Simple, which was planning to revolutionise banking has been taken over by BBVA, and Moven has started partnering with banks in order to exploit its innovative technology. These companies have not required significant investment to be set up, but their impact to date is minimal.
In contrast, setting up a multichannel, full service bank is an expensive business. The most successful example we have seen in recent years is Alior Bank in Poland. The bank started in 2009 and completed a successful IPO in 2013. At the end of 2015, Alior had 328 branches, 523 agencies, 3.0m customers, and was making a return on equity of 10%. The total investment required by shareholders to establish the bank, up to the IPO, was about €500m.
Examples of New Multichannel Banks Launching in Europe Since 2008
Odeabank is also an innovative bank. Started in Turkey in 2012 by Bank Audi from the Lebanon, the bank had opened 55 branches and gained €8.0bn of deposits at the end of 2015 and was already profitable. Bank Audi’s investment so far has been around €500m. Metro Bank in the UK has not been quite so successful since launching in 2010. Although the bank had 40 branches and €6.9bn of deposits at the end of 2015, it remained unprofitable. As of the end of 2015, shareholders had invested €800m but the company had a successful IPO in March 2016.
Although Metro Bank is yet to prove itself financially in the UK, a couple of start-up banks have been successful – Aldermore and Shawbrook. These banks focus on niche markets for lending, particularly small business and complex mortgages, and have been able to raise retail and institutional deposits to fund their balance sheet growth. Aldermore had a successful IPO in 2014 and Shawbrook completed an IPO in 2015.
Banking markets in Poland and Turkey have been growing which perhaps helps to explain why Alior Bank and Odeabank have been able to enter the market and become established relatively quickly. The UK on the other hand is slower growth and therefore niche strategies have been more successful than taking on the retail banks directly.
In general, incumbent banks in developed and competitive markets should have time to react to new competitors. However, they need to maintain a careful watch on the environment and new players, and ensure that investment is available to counter any moves that might have a significant impact on their core business.
Version 1 18th December 2016