It is a tough environment where returns are a must and fees can place a heavy burden on companies that use this form of finance. It is safe to say that VC buys equity in companies looking for strong returns and huge upside in the future.
There are many stories of company chief executives being ousted as the VC company that invested wants fresh blood to run the show. So, what happens when a bank is funded not by traditional markets, but by private VC outfits? We may soon find out…
Over the last ten years, a whole new industry has emerged designed to disrupt and eventually replace traditional banks. It doesn’t have bank branches and doesn’t involve itself in things like mortgages and derivatives. No, this industry just wants to keep banking simple.
Enter the challenger banks. Banks, and in some cases we may have to use that term loosely, it seems, that are essentially apps on our mobile phones and tablets. No customer service departments as we are used to knowing them “in the good old days”. Just someone called Polly, Brad or Eugene who pops up anonymously as an avatar and asks how your day is going.
But the new digital banks like Monzo, Revolut and Starling are coming under just as much pressure as the traditional banks as this global pandemic affects us all. The question is, which one could go “pop” first?
Only in the last few weeks, digital banking customers have been offered new terms and conditions with resets to physical cash being withdrawn at ATMs and fees for lost cards. Some are now charging customers interest on the amount of euros they hold in their accounts.
Times are changing and these tweaks to everyday banking with these app-based fintech outfits signal that all is not well. Banking with the likes of Monzo and Starling is a dream, in my opinion. The apps are well thought out and everything works really well.
A great deal of thinking has gone into what “cool” banking can be on a day-to-day basis via a smartphone. But this comes at a price. These fintechs need funds and capital to exist. And in the vast majority of cases, it is private equity and VC that have ploughed in millions of pounds to get them started and scaled up.
But investors only have so much patience – and this pandemic is testing them to the limit, it seems. Revolut recorded post-tax losses of £107.4 million last year. This despite strong growth in customers and revenues. But this represents a tripling in its losses from 2018, which stood at £32.8m.
But this fintech is not alone. Monzo’s pre-tax losses for 2019 grew to £115.4m, while its competitor Starling booked a £53.6m loss. These figures are not pretty and it not a stretch to guess that losses may be widening in this awful pandemic. Time will tell. And time is what these fintech banks may be running out of on two fronts.
A recent report found customers are moving funds away from these banks to the more traditional names like NatWest, Barclays and Lloyds. What a fickle bunch we are. This outpouring of funds will be worrying for the leadership at these banks and indeed the staff who run them and, in my experience, do a decent job of it.
But the double whammy is not just customers exiting the building. No, it could mean the big “bad” investors call time also. Business plans used to secure finance from VC will show growth in customers, revenues and maybe even a glimpse of profit.
These are the metrics that make investment worthwhile, so that one day the whole lot can be punted or taken public and everyone gets a chunky return. Fair enough. But, with such a huge change in circumstances now, the business plan is way off kilter, I would suggest.
And at some point someone in the room may put a hand up and say “enough is enough”. But rather than end on such a sour note, perhaps therein lies the opportunity for a big bank or insurance company to step in and collect a nice wee banking outfit and keep the whole app-based bank vision alive. I do hope so…
Jim Duffy MBE, Create Special
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