By Nick Lee, Head of Regulatory Affairs at OakNorth Bank
It’s been a decade since the UK welcomed Metro Bank to the high street – the first new bank licensed in over 150 years – and since then, about two dozen new banking licenses have been granted.
Over a career spanning two decades at the Financial Services Authority (the Financial Conduct Authority’s predecessor), and subsequently, at the Bank of England, I oversaw the authorisation and supervision of all new UK banks, and in 2013, worked on the review of barriers-to-entry in the UK banking sector.
Interestingly, with the barriers to entry having been addressed in UK banking, the challenge now facing many of these new players is how to build a profitable business model – something that has been thrown into the spotlight because of COVID-19.
According to KPMG, the global fintech sector has experienced a boom in recent years, attracting almost half a trillion dollars of investment since 2015. So called “neo-banks” or “challenger banks” are responsible for a significant amount of this, with several having closed nine-figure rounds in the last 24 months. The focus for many, however – both on the investor and investee side – has been on growth, with profits being viewed as more of a longer-term goal.
COVID-19 is changing this. Government stimulus has so far delayed what economists are predicting could be the worst recession in 300 years, but even so, we’re seeing less liquidity in the market – H1 2020 fintech investment in the UK was roughly half of what it was last year. While this is sadly forcing some fintechs out of business, and others to be acquired at a price far below their previous paper valuations, for some, it is just the catalyst they need to build business models that aren’t reliant on VC cash to fuel their runways.
The Prudential Regulation Authority (PRA) recently released a supervisory statement which said “By around three years post-authorisation, the PRA expects banks to have more clarity over their path to profitability. By five years post-authorisation, banks should either be profitable or have a clear path to profitability, with definite capital support to achieve this.”
At OakNorth, we’ve always taken a fairly traditional view which is that businesses should make money. We reached cash flow break-even just 11 months after our launch in September 2015 and to date, we have been profitable every year since, so we’ve proven that the PRA’s expectations are achievable. Having raised over $1bn from investors, we’re also firm believers in investing for growth.
It was the 2008 financial crisis that catalysed the regulatory overhaul which led to a change in bank regulation and the ability for new banks to come to market. Whilst many are still yet to turn a profit, I don’t think anyone can deny that their presence has been positive for innovation and competition, which has raised the bar in terms of customer expectations.
I hope the 2020 COVID crisis will be the catalyst for UK regulators to reassess their focus in terms of facilitating effective competition within the market. Having removed the barriers to entry in 2013, regulators must now turn their attention to removing the barriers to growth. For example, scaling back or simplifying certain requirements for non-systemic firms, or ensuring that new or existing requirements are implemented in a proportionate but risk-based way, would be hugely helpful in enabling new entrants to compete effectively, to scale and grow, so they can fulfill their potential and become sustainable and viable businesses.
History teaches us that great businesses can come out of recessions. One of the reasons for this is because a crisis leads to capital scarcity which means businesses have to build in a completely different way. They don’t have the luxury of spending the money they raise on experimenting. They have to be a lot grittier, roll up their sleeves and bootstrap, which ultimately creates a much healthier and more robust organisation.
So maybe the silver lining of the worst recession in three centuries is that it will lead to the creation and growth of some of the strongest, most innovative and resilient businesses in three centuries too.