As Metro Bank’s new chief executive revealed an annual loss and outlined a fresh recovery plan on Wednesday, he asked journalists to be gentle in their criticisms. “I’d ask that you try to be as balanced as you can,” Dan Frumkin said, acknowledging the bank had a bruising year.
But despite the unappealing state of UK banking — which has also forced Royal Bank of Scotland and Lloyds Banking Group to cut their return on equity targets — two of Wall Street’s biggest names are planning to attack the market. JPMorgan is working on a digital banking offering under its Chase brand, following Goldman Sachs, which is planning to significantly expand the Marcus retail business it opened in the UK in 2018.
After years of false dawns with efforts to boost banking competition in UK, analysts and investors said the latest trend could be one that finally has a serious impact.
“We do think the existing incumbents are quite handicapped by their branch networks in terms of costs — we think this probably accelerates the need for them to restructure and be more cost competitive in servicing the retail market,” said Colin McLean, chief executive of SVM Asset Management, which owns shares in several UK lenders.
By many measures, the UK appears to be a particularly unattractive place to do business compared with JPMorgan’s home turf. The bank’s consumer division generated a return on equity of 31 per cent in the fourth quarter of 2019 — almost double Britain’s best-performing high street lender Barclays.
For that reason, chief executive Jamie Dimon has repeatedly said that “it doesn’t make sense to do normal retail banking overseas”. However, while he declined to give any details on JPMorgan’s UK plans at an investor day on Tuesday, Mr Dimon added that “digital may make it different”.
Goldman’s online-only business has already gathered more than £13bn in deposits since it opened in September 2018. Metro Bank’s branch-heavy model took more than seven years to hit the same level.
Marcus’ aggressive approach — offering the highest rates in the market for easy access savings accounts — has driven up costs for small- and midsized banks that rely on such savers. Tesco Bank, Virgin Money and Yorkshire Building Society were among a string of lenders that increased their interest rates or introduced new products in the month following Marcus’ launch, according to analysis by Moneyfacts.
JPMorgan, meanwhile, is expected to go further than Marcus with a faster push into lending, and has lined up an experienced chairman — former senior City regulator, Clive Adamson — to lead the business. In addition to its US retail expertise, the bank has a substantial UK-based payments business, which people close to the company pointed to as evidence it would not have to “start from zero” in the new market.
With an annual technology budget of more than $11bn, it is hoping that more advanced systems will keep costs low enough to turn a profit even in the competitive UK market.
John Cronin, analyst at Goodbody, said: “If you look at margins on UK retail banking products and forget about legacy cost structures and conduct issues, margins on some new business are very attractive.”
Alongside Metro’s decision to rein in its branch opening plans on Wednesday, Lloyds Bank and Virgin Money announced a cumulative 1,300 job cuts as part of efforts to reduce the cost of their legacy high street networks.
However, despite the cuts, most executives still believe their old-fashioned networks will provide some protection against the likes of Chase and Marcus.
“The only people making money in UK banking are the incumbents. And they don’t make it by offering mortgages and personal loans funded by top of best-buy table deposits,” said a senior executive at one high street lender. “The incumbents make money out of inertia, infrastructure and their back books.”
Start-ups such as Monzo and Revolut have attracted millions of customers to their digital-only current account offerings in the past few years, but they have struggled to convince users to make the leap to using them as a main bank account.
In contrast, Metro Bank and Handelsbanken — the Swedish business bank that puts great emphasis on its branch portfolio — consistently appear around the top of customer satisfaction surveys.
Mr Frumkin, who took over at Metro Bank at the start of the year, said many of its branches had “very long leases with no break clauses — moving would be quite expensive.” But while some of its future “stores” would be smaller, he insisted the underlying “bricks and clicks” model worked.
“There’ll be noise today,” Mr Frumkin said, but “our core strength is that we’re people people, we’re store-based — we’re not going to be automating things away that are truly valuable.”