Why build a digital bank?


Though the fintech revolution of the last ten years has seen the launch of a number of neobanks, the incumbent banks still control the market. Does it make sense to launch another new fintech bank in the UK? Ouida Taaffe talks to Jeremy Takle of Pennyworth.

The past few years have seen a number of new fintech banks launched in the UK. Despite the headlines that fintech generates, and the strong interest of UK regulators in encouraging fintech competition, new banks are still a relative rarity.

And, so far, only one fintech bank in the UK – Starling – claims to have reached break-even. The basic challenge for neobanks is that most consumers do not switch their main account, or borrow from them. And customer acquisition costs are high.

According to Accenture, neobanks in the UK – with the exception of OakNorth, which lends to SMEs – lost between £5 and £15 per customer in 2019. In 2020, Some neobanks benefitted from government-guaranteed lending to SMEs. Overall, however, the going is tough.

Why, then, start a new fintech bank?

Jeremy Takle, who is planning to launch a UK bank for the “aspiring affluent” – Pennyworth – in 2021, has form in running a bank. Most recently, Takle was the managing direction of Barclay’s US Digital Consumer Bank, setting up a challenger bank in the US. Before that, he was the MD of consumer lending at Barclays.

“This is not so much about wanting to launch another fintech as about wanting to do it properly,” he says. “What led us to this was working on the digital consumer bank in the US.”

Costs, costs, costs

Takle says that Pennyworth will have advantages over both neobanks and incumbents. “Now you can have technology in the cloud at very low cost,” he says. “The first wave of neboanks have products that are very expensive to run and with very low balances, so their cost of acquisition is higher than the lifetime value. The first wave of neobanks didn’t even have a return on operations, let alone a return on equity.”

Pennyworth, he says, will have a model that is profitable. “It’s a very clear model. We’re a bank. We’ll link borrowers and savers. All it needs is a small spread to cover very, very low operating costs and capital requirements.”

Takle says the minimum efficient scale for a bank balance sheet is “quite small”. “It is not the balance sheet that requires banks to be as big as they are,” says Takle. And a very low interest rate environment doesn’t change the calculation, he adds.

Bankers, not branches

Advances in banking technology, including software as a service, change the cost equation of launching a new bank, but that is not the only helpful development, Takle says. Customer behaviour and expectations have changed too.

“Most people are willing to bank on a phone,” says Takle. “And affluent customers looking to borrow will typically search online for a better rate. We can have a lower cost of acquisition and give very rewarding rates.”

Takle says that Pennyworth will focus on people with incomes of over £40,000 a year, or savings of over £40,000. That is around 20% of the population, he says.

“They tend to have higher balances and they represent around 80% of retail banking revenue,” he says. “In most banks, they get exactly the same service as everyone else as they are not rich enough to be offered wealth management services.”

Takle says that “it is true that people want to talk to people for larger financial transactions”, but he is not convinced that a branch is decisive. “What is more important is that you can speak to someone who is competent,” he says.

The aim at Pennyworth is to allow ‘one click’ connection to a relationship banker. “Since Covid-19, I think many people have learned that being able to bank virtually is very convenient,” he says. At first, the focus will be on products that don’t require regulated advice.

Students will not be an initial target group for Pennyworth. “Historically, that has been a very good way of recruiting gradate customers,” says Takle. “But we are going to focus [first] on the population that has financial services needs today.”

Getting straight to personal

But do fintech banks really offer anything new?

“Our purpose is to help customers make the most out of life…preserving what is really good about banking and taking away the legacy cost,” says Takle. “No-one has come up with a technology that is better than banking for connecting borrowers and savers.”

What has changed, he says, is that the limitations of the [incumbent] model – branches, batch processing, centralized products – can now be overcome. “You can have a direct connection between the bank and the consumer.”

That ability to personalize banking services, Takle says, will allow the next generation of fintech banks to help customers easily get the most of their personal finances. It will also, of course, allow the bank a much better view of what the customer might pay for.

But won’t incumbent banks simply offer the same services? “We believe that incumbent banks won’t be able to do this themselves,” says Takle. “We’ll build a type of bank that can only be built [now] because of the direct connection.”

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