What happened?

Metro Bank has raised £325 million in new funding from investors. The announcement came just days after reports suggested the high street bank needed to raise cash to shore up its finances. Spaldy Investments will invest £102 million, the largest investment into the company.

The bank has also refinanced £600m of debt and its shares have gone back up in response to the deal. Metro’s chief executive said the deal marked a “new chapter” for the troubled bank.

Metro Bank: A quick glance

What? A high street UK bank

Industry: Financial services

Founded: 2010 by US Billionaire, Vernon Hill. It was the first high street bank to open in the UK in more than 100 years.

Current CEO: Daniel Frumkin

Number of branches: 76

How many customers do they have? Nearly 2.7 million customers in the UK.

What makes Metro Bank different to traditional banks?

·       They proposition themselves as a challenger bank. Traditional banks, such as HSBC, Lloyds Bank and Barclays have dominated the industry for hundreds of years. It was a bold move to open, especially just after the 2008 financial crisis and at a time where many institutions were going bankrupt.

·       They have longer opening times. Traditional high street banks, such as Barclays usually open from Monday- Friday, 9:30-3pm. Some Metro bank branches open from as early as 8:30am- 6pm. What made Metro Bank stand out even more, was the fact that they open on Sundays.

·       They’re a brick and mortar type of bank. They only operate in high streets and they have no online presence. Innovative move or a bad decision? It depends. However, this model does give some explanation as to why they operate for longer and over the weekends.

·       They focus on an improved customer service. For example, they put out dog biscuits and water bowls for customers’ pets. They also brand themselves as a people to people and a community bank, offering a range of events to the local community and giving back to local charities.

·       Safe Deposit Boxes. These are boxes that allow customers to store important documents and/or valuables in a secure vault. Not many banks offer this, and it’s something unique that Metro bank does.

How do commercial banks make money in the UK?

Taken from Starling Bank, “every bank takes and holds customer deposits, either through current accounts or term deposit products, such as fixed term savings accounts or ISA’s, and this produces interest income. Banks then lend a proportion of these deposits out to customers, as overdrafts, teem loans, mortgages and other products and this produces interest expense. It is the sum of these two figures that generates net interest income, which is effectively the excess interest generated by banks from lending customer deposits to other customers through overdrafts or other lending products, less the interest it pays customers on deposits.”

I used this word for word, because it offers a simple and effective explanation to how they make their money. However, to summarise this into a few sentences- banks earn interest from loans they offer, such as business loans, mortgages and personal loans. It is the customer that provides banks with the money to make these loans in the first place.

Note something important: In the UK, customer deposits up to £85,000 are guaranteed by the Financial Services Compensation Scheme. This scheme guarantees that if any bank were to get into any type of trouble, customers can get their money back, up and to this figure.

What led them to be in this position?

·       An accounting scandal in 2019. It revealed that the challenger bank had been using incorrect risk weightings to some of its assets. The Financial Conduct Authority had said that its management at the time had knowingly misled investors and fined the bank £10 million. The scandal prompted a huge sell off of its shares (shares had dropped by 90%) and led to the resignation of its founder. Even though its share price has risen a bit since then, it has decreased confidence from investors about the banks future and whether its current model is sustainable in the long term.  

·       A failed bid. The bank had recently asked City watchdogs for authorisation to use its own ratings system to value its assets and mortgages. However, regulators denied the request in September 2023, stating that they wanted the bank to use an external ratings system for the time being. If the bank had been given the green light, it would have freed up some cash so it could continue to expand its business. It also could have meant that they wouldn’t have had to raise as much cash as they did from investors too.

·       A tough few years.  Although the bank has gained 2.7 million customers, analysts have stated that it might have found it tough to make money in the past few years when interest rates were low. The bank’s stock market value was around £3.5 billion at its peak five years ago. The figure now less than £100m.

·       Worries about the banking industry. Following the collapse of Silicon Valley Bank and Signature Bank in the US earlier this year, concerns still abound over the strength of the industry. There are calls to usher in tougher rules and requirements for banks from financial regulators.

Enter competition

As we know, Metro bank brands itself as a challenger bank to the traditional high street banks that have been gracing the industry for several decades. However, newer banks have been challenging both Metro bank and traditional high street banks.

Online only challenger and neo banks, such as Monzo, Starling and Revolut have been popping up throughout the last few decades. What makes them different to other banks? Let’s look at the online bank Monzo to find out.

Monzo: “Online Banking Made Easy”

Established: 2016

Founders: Tom Blomfield, Jonas Huckestein, Jason Bates, Paul Rippon and Gary Dolman.

Current CEO: TS Anil

Number of customers: 8 million +

What makes Monzo attractive?

·       It offers customers the chance to split bills. They make it very easy to pay and get paid by your friends (especially if they have a Monzo account). This feature doesn’t exist in the more traditional banks.

·       You can save your spare change automatically. They round your purchases to the nearest pound and put the spare change into your Pot/s. Again, this isn’t possible with more traditional banks. There is power in compounding your spare change!

·       You can create Pots. These are basically accounts where you save with a specific goal in mind. I personally have pots on driving lessons, holidays and more. Opening up savings accounts with more traditional banks comes with more stringent rules. I say that Pots does a good (and fun) job at simplifying the process. You can also lock your pots, so you don’t end up withdrawing from the account.

·       Unique features. Their standard cards comes in a bright orange colour. This may be a very small and unimportant reason, however, I believe that it adds a bit of cool and quirkiness to the overall brand of Monzo. This is unique compared to other banks.

Another unique feature they have, is that they operate entirely online. I think this is a good move to make, especially because we live in a digitally transformative age. Companies, banks included, have to keep up with the times we’re living in.

Disclaimer: This is not an advertisement. I am just stating some reasons as to why I enjoy using Monzo. 😊

The future of Metro Bank

Metro have managed to get themselves out of the woods for now, but this saga still comes with worries and concerns about its future.

·       Is their business model still sustainable? A lot of their problems and struggles have been as a result of the fact that they only operate in physical stores in high streets. Compared to online only banks, operating physical stores comes with increased costs, such as paying for rent and inventories such as chairs, tables and computers. They even plan to open 11 more stores across the UK in 2024 and 2025. Considering the tough economic times we’re in, such as high inflation, high interest rates, geopolitical uncertainty, and the fact that winter is coming, I’d say that physical stores carry much more risk. I won’t be surprised if the top executives are considering more of a focus on bridging up their online presence in the future.

·       They have struggled to be profitable on a consistent basis. I can see why this is the case considering the low interest rates that have occurred within the last few years. 2023 marked the first profitable year in a while (think higher interest rates). In July 2022, the IMF stated that UK interest rates need to, ‘stay higher for longer to beat inflation’. If this is the case, then Metro bank could be seeing profitability for a longer period. This is good news for them, as it means more money. I’d say what they need to do, is pass on more of the money to customers who are saving with the bank. Higher returns for customers means that they are more likely to stay with the bank in the long run. At the end of the day, the more customers, the better.

·       Adapt to the times we’re in. This point links to what I stated earlier. We’re living in a technological era, more things are being done online than ever before. Metro Bank is still going against the grain by operating in physical stories. I believe that they need to boost their online presence and invest more into their technological areas, so they can cater to a wider pool of people. It’s good that they open for longer and open over the weekends, but people still transact at 3am in the morning. It’s also good that customers can get good customer service, however, offering water bowls and snacks to customers pets could be re-routed into investing into the technology side of the business. If they want to sustain their future, they need to adapt with the changing times we’re in.

Let’s see how Metro Bank will fare in the next few years to come…

That’s it for this week and as always, I’d love to know your thoughts this week’s story.

Will they need to raise another round of investment? Will they collapse? Will they thrive?

Until next time, remember to stay curious!

DISCLAIMER:

This blog is for educational purposes only. What I post is not financial, investing or legal advice.

This blog isn’t written by an individual who has years of experience within the corporate world. Nor is it written by someone who has a lot of accolades or academics behind her within these fields. However, it is written by one who has a desire to better understand these industries and has just decided to share her journey with others.

Further resrouces:

‘What Happened to Metro Bank? Will it collapse?’ - YouTube video by Jubair’s Finance

‘Metro Bank Founder Fully Resigns Amid Accounting Scandal’ - YouTube video by PYMNTS Media

‘Metro Bank: What’s going on and is my money safe?’ - BBC Article