The challenge of the challengers

Written by Juan Palenzuela, Associate

Edited by Kevin Pringle, Partner

Good morning,

It seems like challenger banks have access to an almost unlimited money tap. Both Monese and Monzo have been in talks to raise up to £100m from investors in the early part of this year, while Revolut is close to completing a $500m funding round within the next few weeks. Yesterday, Starling Bank reset the desolate “days without a challenger bank getting funding” tally once again by announcing the completion of a £60m round from existing investors.  But how did we get here?  Culture has played a big role in the rapid growth of the challengers, which many share in broad terms: basing the business around accessibility, transparency and, above all, (very) close relationships with customers.  It has been an explosive mix. Their accessibility attracted people that previously struggled to access traditional banks, such as recent immigrants, while their transparency delighted millennials, who were tired of hidden fees. But the latter element has really been taken to heart.  The level of engagement that the challengers have enjoyed is unheard of amongst the more traditional banks. In the past, users have crowdfunded them at critical stages, while also testing their beta versions (willingly). Many challengers also have forums where users discuss the features that they would like to see. Monzo even started selling branded t-shirts and hoodies, upon request from some of its 3.5 million users.  But transforming these numbers into profits has been rather difficult. The fight to change the stereotypical profit-centred banking model is now starting to backfire, and some CEOs are now wondering if they went too far. According to Monzo’s CEO, “it created a perception... that making a profit is evil” adding that “whenever we were charging for anything, people thought that must be fundamentally wrong”.  As it stands, the path to profitability will be a long one, and the availability of options for consumers will only lengthen it. Naturally, once the industry becomes more concentrated, the challengers will start to resemble more the culture that they so hard fought to transform.


The HS2 rail project will likely be given the green light at a special meeting of the cabinet, according to new reports. An announcement is expected today. The proposal has faced opposition from both Labour and Conservative MPs for being over budget and behind schedule. If the plan goes ahead, the prime minister can expect a rebellion of up to 60 Conservative MPs.  Annegret Kramp-Karrenbauer, the leader of the governing Christian Democratic Union, Germany's main governing party, announced yesterday that she is standing down. Kramp-Karrenbauer was seen by many observers as Merkel’s protégée and favoured successor.  Armed troops in El Salvador stormed the country’s legislature following orders by president Nayib Bukele to pressure parliamentarians to approve an £85m loan to better equip the security forces. The move has disappointed many international observers who looked at Bukele as a centrist and pragmatic moderate reformist.

Business and economy

The Mobile World Congress, which is set to take place in Barcelona at the end of February, has been heavily affected due to the coronavirus outbreak, according to organisers. Sony, LG, Intel and Nvidia are some of the companies that have cancelled their participation to avoid further contagion. In addition, handshakes have been banned and all passports will be vetted to check if attendees have visited China in the past two weeks. Pressure is increasing on the organisers to cancel the entire thing.  Xerox raised its bid to buy HP to $35bn, putting HP’s valuation at over four times that of Xerox’s ($8.15bn). The board of HP previously rejected the deal, arguing that it undervalued the company.  Turkey’s lira fell once again yesterday despite the government’s effort to control it by imposing new limits on the bank’s foreign exchanges. Although it briefly helped the currency gain momentum after Friday’s sharp slump, selling resumed this week. It currently sits at 0.17 against the dollar.

Columns of note

In the Financial Times, Tony Barber argues that Annegret Kramp-Karrenbauer’s departure is yet another symptom of the fragmentation of Germany’s political system. Although still far from following the path of Austria, where the far-right has become mainstream, the risk of political instability has nonetheless increased.  Writing for City AM, Zara de Belder says that businesses will need to take a hard introspective look to understand their corporate purpose. Above all, what is their core purpose?

Source: The Times


What happened yesterday?

Equity markets across the world had mixed results yesterday. In the US, news of major corporate deals temporarily boosted confidence and distracted investors from the coronavirus hysteria.   At the close, the Dow Jones Industrial Average was up 0.60% at 29,276.82, while the S&P 500 was 0.73% firmer at 3,352.09 and the Nasdaq Composite finished 1.13% stronger at 9,628.39.  In Europe, meanwhile, the mood was unsettled. The success of Sinn Féin in Ireland’s general election and the departure of Annegret Kramp-Karrenbauer worried investors in the continent. By the end of trading, the benchmark Stoxx 600 had turned around to rise 0.07% to 424.64, alongside a 0.15% dip to 13,494.03 for the German Dax, while Milan's FTSE Mibtel was up 0.12% at 24,507.70.  In the UK, the FTSE 100 was down 0.27% at 7,446.88, while the FTSE 250 slipped 0.03% to 21,492.32.

What's happening today?

Finals Pjsc Polyus AGMs BMO Capital & Income Investment Trust Keystone Investment Trust TUI AG

UK Economic Announcements (09:30) Balance of Trade (09:30) Gross Domestic Product (09:30) Industrial Production (09:30) Manufacturing Production (09:30) Index of Services (09:30) GDP (Preliminary)

Source: Financial Times

Did you know?

Shrek was originally given a Canadian accent. Halfway through the animation, Mike Myers decided that the character would be better portrayed with a Scottish accent. The film had to be re-animated at a cost of over $4m.

Parliamentary highlights

House of Commons Oral questions HM Treasury (including Topical Questions) Legislation Prisoners (Disclosure of Information About Victims) Bill: Second Reading Opposition day debate Migration and Scotland: on a motion in the name of the Scottish National Party - Ian Blackford, Kirsty Blackman, Stuart C McDonald, Joanna Cherry, Anne McLaughlin, Patrick Grady  House of Lords Oral questions Legislation Scottish Parliament No business scheduled.