Tipping point for fintech banks?

Atom Bank hiring Citi advisors for a possible sale may lead to a rush to snap up app-only lenders.

Pressure could mount on digital-only banks to sell out to bigger rivals over the coming years despite their breakneck growth, say industry-watchers.

Neo banks were put in the spotlight after it emerged last week that Durham-based Atom Bank had appointed US banking giant Citi as an advisor to steer it through a crucial funding phase that could lead to a sale, according to Sky News.

The most likely predator for the bank, launched in 2014, is currently Spanish high street rival BBVA, which took part in Atom’s  £150m fundraising almost a year ago.

BBVA owns almost 40 per cent of Atom’s shares, and is understood to hold an option to acquire the remainder of the digital bank’s stock.

Sources close to Atom deny that hiring Citi necessarily means that the management of the business, led by founder and chairman and founder Anthony Thomson, is ready to sell, but concedes that either a takeover, further equity fundraising or a stock market listing is likely this year.

A spokeswoman for Atom Bank told AltFi it was business as usual for the lender, adding it was “delighted to have their backing and support” of the Spanish giant, adding that “the intentions of BBVA are a matter for BBVA”.

A spokesman for BBVA said it “would not comment on market speculation”.

Closure of 2,900 high street branches

However, a number of observers wonder if the industry will see a number of mobile banks picked off by larger players, taking advantage of the consumer demand created by these new entrants.

More consumers are forecast do their banking on their smartphones than a laptop this year, according to financial services analyst CACI.

It added, in a report published last May, that 22 million customers used mobile banking apps to manage their current accounts – an average increase of 3.4 million users a year in over the past five years.

The body said customers now visit a bank branch only five times a year on average, adding that it expects 35 million people – around 60 per cent of current account holders – will manage their accounts through apps by 2035.

This has led to the closure of just under 2,900 UK high street bank branches between 2015 and the end of 2018, according to a report by consumer body Which? last year. A rate of almost 60 branches a month, as customers increasingly bank digitally.

Customer growth

By contrast, a raft of mobile banks have added millions of customers and attracted hundreds of millions in venture capital, and achieved prized billion pound valuations, raising the possibility of lucrative exits for early stage investors.

In the UK, leading app-only bank Monzo, founded in 2015, has more than one million customers, but announced that its annual pre-tax losses more than quadruple to £33.1m last July.

German banking app darling N26, has amassed more than 2.3 million customers in 24 European markets since it was founded in 2013, but the business valued at $2.7bn tells the market it hopes to turn its first profit in the first half of this year.  

The large numbers of customers these young firms have attracted over a few short years has attracted competition.

Traditional banks have set up digital units which develop their own platforms, as well as taking stakes in rivals.

“The idea here is that they have a foot in both camps,”said Robert Murphy, global head of financials, at Edison Investment Research. “The idea is that at some point they will have to make a decision to buy the rival and put its resources into that platform, or sell it and back its own operation. I wouldn’t be surprised if BBVA bought Atom.”

Barclays, is typical of established players, when it announced last April that it had set up a new unit focused on developing fintech operations, that may originate from within or come from outside the lender.  

Meanwhile, last March it emerged that US online giant Amazon held talks with investment bank JPMorgan Chase to develop a personal account product.

Tech titan investment

The retailing-to-TV business has also become a major player in online lending to small businesses, announcing last in summer 2016 that it had originated $3bn in loans since launching the service in 2011.

Murphy said: “The amount of money tech titans have at their disposal is massive. They can easily invest double what the largest mobile bank firm could each year, and for years on end.”

Another problem among mobile banks is that most customers do not treat them as their main bank, holding very limited funds with them, which in turn limits the amount the bank can raise from depositors for lending. The basic operating model for a bank.

Monzo’s annual report showed for the year to 28 February showed that its customer deposits were £71.2 m, the equivalent of less than £150 per account at the time.

“Many of these banks have limited product ranges,” said Murphy, “which limits the number of customers who completely switch banks. However, adding more sophisticated credit products, like mortgages, needs experienced staff with underwriting skills.”    

Rate rises

Rising interest rates around the world, after more than a decade, may also eat into the amount of cash private equity firms make available to mobile banks.

The US Federal Reserve lifted its benchmark rate by 0.25%, to a range of 2%-2.25%. This is the eighth rate rise since 2015, continuing its policy of normalising interest rates, despite warnings from US president Donald Trump that this will slow the American economy. Before this series rises the last US rate hike was in 2006.

Last August, the Bank of England raised interest rates for only the second time in a decade to 0.75 per cent from 0.5 per cent, as it also seeks to gradually borrowing costs to more usual historical levels.

Edison’s Murphy said: “The rising cost of debt may cause private equity firms to narrow funding in this area.”

Another City analyst added: “There are too many banks in this space and I struggle to see how they will all be around in a few years.”

The next few years ahead may sort out the mobile banks with the business models to convert their large consumer bases into viable businesses.