The challenger bank moniker is a bit misleading. It has been bestowed upon non-systemic banks by the systemic banks to create the illusion that lots of people are challenging them across the board, which frankly is not the case.
Some of the larger challenger banks like Clydesdale, TSB, Handelsbanken and Metro Bank, which have branch-based business models and are trying to provide a broad range of products, find it demanding to truly challenge because of their lack of scale and inherent capital disadvantages. At the other end of the spectrum, you have so-called challenger banks like Secure Trust Bank (STB) and Shawbrook, which may be better described as specialist lending businesses that have a banking licence.
Big banks are dumbing down. They are morphing into quasi utility providers
At STB, we focus on very specific areas of the market where we believe we can compete economically and sustainably against the larger incumbents. We are aided by technology and by the fact that the big banks, in their desire to right-size themselves, are to an extent dumbing down. They are morphing into quasi utility providers.
Therefore, outside the standard product range set, it is actually difficult to go into a high street branch and talk to somebody who can give you a decision on the spot. Whereas banks like us can meet face-to-face with businesses and non-standard customers and provide a quick response to requests for our lending products.
The main barrier to growth is first and foremost capital. If you look at a 50% loan-to-value mortgage, a large bank typically has a 1000% capital advantage relative to a smaller bank. It makes it economically impossible for small banks to have low risk lending portfolios because you can’t compete when there is such an unfair capital disadvantage.
Capital inequities must be addressed. One solution is for the European Banking Authority to adopt the same approach as in the US, where the Basel standards are only applied to systemically important banks. The remaining 7,500 banks are regulated on a proportionate basis relative to size.
On talent issues, the good news from our standpoint is an ongoing contraction of the larger banks. People confident in their abilities are applying for and sometimes getting voluntary redundancy. They can walk out of their large employer straight into the arms of a smaller employer where they can spend more of their time doing banking with clients and less time involved in bureaucracy. That’s motivating and empowering.
Increasingly, up-and-coming banks are seen as attractive places for highly motivated, ambitious people to progress their careers. Often faster than in banks that are shrinking.
Much coverage is given to the threat posed by FinTech. But one way to look at the branchless challenger banks is that we are FinTechs with a banking licence. At STB, we will process about £3bn worth of lending applications for motor loans in 2016 without any paper whatsoever. Of that, we will write around £120-130m. None of it would be possible without extensive use of financial technology.
Small banks must strike a balance between growing their own and bringing in fresh thinking
In terms of talent issues, there is a difficulty for those of us geographically distant from London in finding the right quality of risk and compliance people. The sheer investment the big banks have made in this space, in some cases through necessity, has had an inflationary impact on the price of these guys and their availability.
The Senior Managers Regime has put greater onus on Non-Executive Directors. Given the limited supply of experienced bankers with a clean reputation, it is becoming harder to find non execs of the right calibre.
Unusually for a bank CEO, I am both a qualified banker and a qualified treasurer. At STB we put great emphasis on good old-fashioned, relevant expertise and proactively sponsor people for a range of banking and specialist qualifications.
But you don’t know what you don’t know. So going forward, small banks must strike a balance between growing their own and bringing in fresh thinking to create a diversified gene pool.
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