Why challenger banking is still a challenge

Cashplus has been profitable for seven straight years now - developing a proven product portfolio that has changed the lives of countless SMEs and consumers. But as we take the next step in our journey towards evolving into a bank, what do we look like compared to the rest of the market?

In this review I’ve used two private neo-challengers, Atom and Monzo, as they’ve been willing to share quite openly their financial results. Beside these two let’s not forget the first true challenger bank, Metro, who was the first to get a UK Bank license in 100 years.

At nearly 13 years since launch, Cashplus may be older than Metro (8), Monzo (3) and Atom (2), but we’re more than holding our own.

Here’s how each business performed financially two years after their respective product launches:

There are different strategies at play here, as some invested straight away into becoming a bank (Metro, Atom) and some started life with a prepaid card offering and no credit proposition (Cashplus, Monzo). As a result, comparing revenues across these peers is difficult as most credit providers use Net Interest Margin (NIM) as their income number rather than the straight revenues of traditional non-credit fintechs. I could easily be disputed on my comparison methodology, but I believe it’s sufficient to provide a perspective for different strategic approaches of the challenger bank market both current and historical. And I believe there is great insight to learn from this historical perspective.

Metro’s Retail Bank Model

Metro launched in July 2010 and gained some plaudits for 24/7 branch hours and promising to open a bank account in just 15 minutes. This seems archaic now with Cashplus and others committing to three minutes to open an account, but at the time (and even today) other banks could take weeks if not months, so 15 minutes was revolutionary. But interestingly, the press was not impressed with any of its products. With no competitively differentiated product and an expensive bricks and mortar footprint to invest in, the firm looked doomed to fail, at least to me. Despite cumulatively losing £229m over the first six years it turned things around and posted £300m in revenue and £19m in profit in 2017.

What did Metro get right? It didn’t listen to the press or public perception. It created loyal fans out of customers thanks to its great service. Products were priced competitively and fairly and most importantly it did not give these away “for free”, or even worse, at a loss.

As it built scale, the bank got to profit the old fashioned way. Simple, right? 

Digital Challengers Atom and Monzo

Now roll forward a full decade to the current world of new digital challenger banks. For digital-savvy users, these new products are ‘cool’ to have and to use. And by giving products away for free (Monzo) and having savings and mortgage products at interest rates on top of nearly every comparison table (Atom), they both acquired large number of customers fast by lowering entry barriers.

Customer and even public engagement in the new digital age of banking were born from these product launches, so I give these pioneers credit for helping change the perception of banking. Tom Blomfield’s vision about Monzo and the future of banking is about as clear as any challenger bank CEO I’ve seen in this space. I don’t agree with some of it, but at least I understand it.

But even Tom with his engaged customer base is going to be challenged as Monzo has set an expectation of “free of charge” banking products. Monzo and others talk about their Platform and Marketplace to be the future, which I find odd. Neither a Platform nor a Marketplace needs a bank license to operate. Why spend £100-500m investment on acquiring banking customers with uneconomic banking products only to leverage that relationship on a Platform or Marketplace, for which you don’t need a bank license? These challenger banks have proven an ability to acquire customers really well, but even after two years of operation their ability to build a profitable product strategy is still unproven. Can they adapt? Sure, but it’s a high-risk strategy to invest in unprofitable products and then ‘hope’ to find another product model that will achieve profit and the dream of bank domination each have sold their investors.

In short, I think this is where many digital challenger banks may have got it wrong. Simply acquiring customers does not prove a business model. ‘Cool’ doesn’t pay the rent, staff salaries or shareholder returns. Granted it’s relatively easy to raise another £100m+ these days, but at some point, investors will finally wake up and want a solid business model that has a proven and tangible road to profitability.  

The Cashplus Difference

So where does Cashplus sit in this mix? Like Metro, we didn’t capture the hearts of the press 13 years ago, nor the mass market awareness of the public like Monzo or Atom. But like Metro, Cashplus created alternative banking products that had a positive gross margin on day one of operation and were uniquely and successfully marketed to overlooked consumer segments.

We launched and serviced our first product at a fraction of the cost of any challenger bank and (as above) only lost £4.2m in the first two years of operation versus the £43-£94m of the other players.

Cashplus has been enjoying the past seven years investing our profits back into improving our products, enhancing our digital and mobile experience and further leveraging our data enablers to ensure we continue to exceed those spending ten times our investment level. Becoming a bank is one of our biggest current investments but even that has a very strong and known business case. We have been fortunate that through great products and services, complemented by customer loyalty, Cashplus now holds over £250m of money for SMEs and consumers. A significant portion of this will become bank deposits, accessible to lend at no incremental costs under our proposed banking license. This will provide more opportunities to lend, of course, at positive NIMs.

Some will say 13 years (and it will be longer for Cashplus) is too long to realise a return on investment. I don’t disagree, but I’ve been fortunate enough to have the most patient Investor Director and Chairman in the world behind me.

To conclude, it’s great to see such rapid innovation in banking over the past decade. But Monzo, Atom and even Starling and Tandem banks, along with the high-flying non-banks of Revolut, Tide, Pockit, Loot and many more, need to realise that there is more to success than customers and a ‘cool’ experience. Customers, and the revenue they generate, need to support company growth and innovation, not just more investor money.

Compared to these Aesopian hares, Cashplus is certainly the tortoise. But remember what happened in that story … the tortoise actually won the race.        

Rich Wagner, Cashplus Founder and CEO