Can banks compete with fintech?

Bank stocks, Barclays outages, Monzo CEO, Zing and Chase UK

“False binary of are we a tech company or a bank…we are both.”

TS Anil on the biggest flaw of the Monzo management team when he took over as CEO

This piece looks at the booming share prices of traditional banks, the profitability of the banking sector, Barclays outages, a recent interview with Monzo CEO TS Anil on its amazing turnaround story, and why Chase UK may not go the way of HSBC’s Zing.

For new readers exactly a month ago I did a long deep dive…

Are traditional banking businesses surviving?

Bank share prices are rallying

Neobanks and fintech are back. They are growing customers at a fast clip. They are seeing accelerating revenue growth despite the law of large numbers. Most of them are profitable and some have strong profit margins. So, does that mean traditional banks are struggling?

Far from it.

The KBW US Banks Index is up 9% this year, and 50% over the last year outpacing the S&P500. The STOXX 600 European Banks Index has risen 10% this year and 38% over the last year. And the consumer-focused heavyweights within this are performing well. For instance, in the UK, Lloyds Banking Group is up 13% this year and 47% over the last year. In Italy, Unicredit led by superstar Andrea Orcel is up 16% this year and 67% over the last year.

The chart below illustrates how European bank share prices have outpaced even the share prices of the Magnificent 7 tech group in the last 3 years.

Bank profits are up strongly, and consumer banking is driving returns

But unlike most of the stock market, there has been no multiple expansion for European bank stocks, with earnings growth in line with and often better than share price momentum since 2022. Return on equity (ROE) has also risen across the sector over the last decade. According to the European Central Bank, ROEs for US, UK, and Eurozone banks have all been around 10% in the last 3 years. But ECB data shows that before this there had been considerable divergence with the US sector the healthiest with a decade of high single-digit ROEs or higher, while the UK and Eurozone had struggled with a decade of low to mid-single digit ROEs. The benefit of higher interest rates could also be seen in net interest margins in Eurozone banks that rose from a trough of 1.2% in 2021 to 1.6% by 2024.

Nevertheless, there is a big skew within the improved profitability of the banking industry. For instance, I highlighted in House of Dimon that the earnings juggernaut that is JP Morgan, generated a record net income of $57 billion in 2024, which was more than the combined earnings of Wells Fargo, Citigroup, and Goldman Sachs.

The gap in profitability between Wall Street and Main Street banking is as big as at any point in the last decade. JP Morgan has the benefits of unprecedented scale and breadth of market-leading franchises, which underpinned the 18% ROE in its commercial and investment bank in 2024. This is far superior to its peers with Goldman Sachs’ global markets and investment banking division at 14.5%, Morgan Stanley’s similar business line at 14%, and Citigroup’s markets and investment banking divisions at 9% and 7% respectively in 2024. Nevertheless, this is far short of JP Morgan’s consumer bank Chase, which delivered ROEs of 32%.

Internationally, a similar story can be seen with leading franchises. HSBC which is going through a strategy revamp generated ROEs of 30.4% and 21.1% respectively in retail and commercial banking in the first nine months of 2024. Meanwhile, its corporate and investment banking business lagged at 13.8%. Barclays has generated an ROE of 21.4% in UK retail and business banking and 10% in investment banking in the first nine months of 2024.

The gap between consumer banking and investment banking ROEs is as much a feature as a bug of the business models as trading desks are more capital-hungry. Profitability can vary by geography though. For instance, the German retail banking market unfortunately for Deutsche Bank has always been more fragmented and less profitable. This contrasts with the UK.

The age of digital banking

Digital banking has of course changed the competitive landscape of retail and SME banking. Traditional banks have benefited largely from higher interest rates rather than customer expansion or significant new product revenue growth.

The traditional argument is that neobanks are not your primary bank. I have used this argument for the last 5 years, but I wonder whether primary banks are still a thing. Yes, the bank you get your salary paid into is likely to be used more frequently but in an age of mobile banking is this the same as in the bricks-and-mortar era? Do people have their income, mortgage, savings, and outgoings all with the same bank or spread across multiple banks?

Neobank user interfaces are nice and shiny but large traditional banks have benefited from safety and inertia. If there is one thing that could make customers reassess this, it is platform downtime. Last summer leading UK banks were hit by a major outage. A few days ago, the Barclays mobile and online banking payments system was hit for 48 hours by a major outage. This was the message I received on the Barclays banking app throughout…

Although this was the first time there was a major outage in a while the Barclays app was also not making payments a few weeks ago on a Friday. Customer service had told me to wait a few days! This time the outage was systemwide though. This was no usual Friday but end of the month when payroll hits bank accounts as many people rebuild their balances after Christmas spending. It was also the filing deadline for tax returns in the UK. The analogy would be like a major stock exchange being down for days during an important earnings season.

It was a stark reminder of the fact that although banks like to call themselves technology companies most of the plumbing of banking was put in decades ago and when you pull up the creaking floorboards there are many corroded pipes underneath them.

Bank management teams taking a leaf out of the book of Klarna co-founder Sebastian Siemiatkowski are out talking about how AI will revolutionise their business models and improve customer service, but I am not sure Barclays retail banking got the internal memo. Hard to know if it was a drunk AI chatbot or a human but let’s just say that Barclays customers were not mildly amused by the customer service team. I have been a customer of Barclays for almost 30 years since they tempted me with some free offers outside of my university on a day when I probably had a hangover. As someone following the industry I have diversified across many banks so avoided that single point of failure. Many other people haven’t but outages like this give good marketing material for new more digitally savvy banks!

The Monzo turnaround story

Monzo CEO TS Anil spoke to boy wonder podcaster turned venture capitalist Harry Stebbings recently. I met TS Anil for breakfast last year, and he wasn’t wearing a hoodie like he did for this podcast. I was wearing a suit a far cry from Harry’s very short shorts. But then again Harry is famous!

Harry has always been honest about how his podcasts are supposed to be a “safe space” for entrepreneurs and how Harry allows them editorial rights. He is correct that Monzo under TS Anil has been a big turnaround story. I have found TS to be impressive – deeply knowledgeable about the pain points in banking and what his focus is. He lives up to his long resume of leadership roles from blue chip banking and credit card firms.

But I would argue that the return of Steve Jobs to Apple in 1997 is a high bar on turnaround stories and Monzo is as much a turnaround of a bank as a tech story, but this is how Harry described TS’s achievements on X:

Customer engagement

Despite the Stebbings love letter to Anil, Monzo currently has a global customer base that is one-fifth of Revolut’s, and the valuation is a fraction of what Revolut’s has reached. Anil’s argument has always been that Monzo is about building deep engagement. There is some truth to this. I estimate that Monzo generates around 50% more revenue than Revolut in the UK on a broadly similar number of customers.

Monzo is consistently at the top of UK industry surveys in terms of customer satisfaction in retail mobile banking. As in other interviews, Anil is quick to highlight the popularity of Monzo’s financial planning tools and functionality. He also mentions how Monzo has chosen not to offer crypto as Monzo doesn’t understand the value proposition here. When Stebbings highlights that he is a free-market person who doesn’t believe in paternalistic guidance Anil pivots to highlight he doesn’t believe Monzo can add value in terms of advice to their customers in crypto and hence doesn’t offer it.

How different corporate executives define engagement is as much an art as science. When Stebbings asks Anil, he says it is about how often their customers use Monzo products. Anil is right that Monzo’s ARPU (Average Revenue Per User) is higher than many of its peers, but the data doesn’t support his point that traditional retail banks have ARPUs that are only twice as high as Monzo, for at least leading players.

UK market leader Lloyds Banking Group has a retail deposit base that is 30x larger than Monzo and an average deposit size in its retail bank of more than £11,000, which is around 10x larger than Monzo. Neobanks are used more frequently for FX and card payments (interchange), but Lloyds Banking Group still generates 12-15x more revenues than Monzo in retail and SME banking, despite having a customer base less than 3x larger than Monzo. A similar gap can be seen with the likes of Barclays. Much of this is of course generated from balance sheet-heavy credit products.

A bugbear of mine on the neobanks is that these firms and venture capitalists like Stebbings all refer to gross revenue while legacy banks report net interest income as revenues. Franchise quality can be a subjective discussion but always comparing your gross revenues to someone else’s net revenues is just bad maths. The same happens when many VCs look at the payments’ processors. The difference between gross and net revenues can be substantial.

Growth

Monzo had 4.2 million customers and over £1.5 billion in deposits when TS Anil became CEO in May 2020. Over 4 years he was able to grow this to more than 11 million customers and £11 billion in deposits. That is an amazing achievement.

How does this compare to the rocket ship Revolut? The latter has grown its customer base faster by 4.5x to 50 million but its deposit base growth of around 5x has lagged Monzo over the period. This aligns with Anil’s point of focus on customer depth. The customer growth comparison has become particularly stark recently as Revolut has increased its pace of expansion. Anil mentions the current run-rate of 200,000 new customers per month as a sign of the demand for Monzo but that looks pedestrian compared to Revolut’s 1 million new customers per month.

The two large opportunities for geographical expansion for the UK neobanks are Europe and the US.

In Continental Europe, Revolut has tens of millions of customers including 3 to 4 million each in Ireland, France, Romania, Spain, and most recently Italy a few days ago. Monzo has decided to go Pan-European and is picking Ireland as its beachhead. Anil is very careful not to be drawn into negative sound bites about Revolut and others but does throw some shade on them by saying Monzo is focused on deep customer engagement and not planting vanity flags. But you do come away wondering if Monzo has enough differentiation for last-mover advantage, particularly as other neobanks are on the prowl including bunq and N26. The latter had been constrained by the German regulator in taking up new accounts until recently.

The US is the largest single market for banking but the neobanks have historically struggled to make it there. When Harry Stebbings asked Revolut co-founder Nik Storonsky a few weeks ago Nik said that he thought having a banking license before launching was key as the US is a credit card-dominated market. He thought an e-money offering in an initial launch would not be as successful as it was in Europe, which is a debit card-driven market. Storonsky also thought that working with partner banks was not a viable option as it slows your ability to iterate products and can create regulatory bottlenecks.

TS Anil highlighted the deep penetration of alternatives such as peer-to-peer networks VENMO and Block-owned Cash App as challenges for neobank entrants in the US market. Monzo pulled out of the US 3 years ago having failed to get a banking license. Monzo has been talking about re-launching for the last year and hired a former senior executive from Cash App to lead its US business. Anil told Stebbings that this time around was different as they were not going for a banking license but would work through a partner bank, something common in the US for fintechs.

Very different approaches are being taken by Revolut and Monzo to attack the US market. When Stebbings asked Storonsky about Monzo’s re-entry plans for the US, he claimed not to know about them. It seems highly unlikely he would not know about his biggest rival’s plans. Was it just Storonsky’s turn to throw some shade at a rival?

Tech company or bank

TS Anil highlighted that at Monzo’s most senior levels, the biggest challenge when he became CEO strategically was a “false binary of are we a tech company or a bank.” He told his generals “We are both”. As well as common VC terms like product debt or tech debt, one the largest challenges when Anil had become CEO was “controls debt” something very important for Monzo to get right if it wanted to scale with a wide product offering as a highly regulated institution.

For a while, Anil has described Monzo as having roughly three equally important sources of revenue. One-third of revenues comes from interchange fees. One-third comes from unsecured loans/overdrafts and one-third comes from what TS Anil told Stebbings was “good fees” not customers making mistakes. He says these are subscription fees, Monzo marketplace (here Monzo provides services like being the front-end aggregator for other bank’s mortgages), and interest margin on savings accounts.

But here’s the thing. Most of this is coming from the same sources as traditional banks. Less than 5% of Monzo’s net revenues come from subscription fees. Net interest income was around two-thirds of Monzo’s net revenues for the year ending March 2024. This was the unsecured and overdrafts portion that Anil tells Stebbings about, but a much bigger part of last year’s revenue (around 40%) came from interest income on cash and treasury investments i.e. parking customer deposits at the Bank of England and in Gilts.

Is that “good fees”?

It is good in the sense that this is a highly profitable earnings stream for a bank. But what happens if interest rates halve? There is a reason that public market investors put 6x price-to-earnings multiples on this sort of earnings. It is highly cyclical. To be fair to Monzo given they have grown their deposit base significantly over the prior 2 years this is not 100% cyclical but when interest rates make massive moves it dwarfs the impact of deposit growth.

TS Anil was the architect of one of the great fintech turnaround stories but when he took over as Monzo CEO interest rates were zero and today they are around 5%. This makes a difference.

Where next for Monzo

The Financial Times recently reported that there is a divergence of views about where Monzo should list with TS Anil (who was previously based in the US) preferring the US and the UK-based Board preferring the UK. Stebbings in line with the rest of the VC and startup community wondered why anyone would list in the UK given the lack of institutional support for growth companies. The main soundbite from the Stebbings interview with Revolut’s co-founder recently was Nik Storonsky saying that it is not rational to pursue a UK stock market listing over a US one given the UK market is less liquid and more expensive than the US. He cited stamp duty on share transactions in the UK as one reason.

Both Stebbings and Storonsky are directionally 100% correct.

The challenge for Monzo however, will be do US investors put bank earnings on a bank PE multiple and not a software one. Your typical SaaS company listing in the US may have a significant amount of revenues that are recurring. Companies listed in the US don’t always trade at a premium to those in the UK. The gold standard of fintech, Nubank listed in the US trades on 25x 2025E PE while money transfer firm Wise listed in the UK trades on more than 30x 2025E PE.

Capital markets businesses such as investment banking, trading, and asset management often have global synergies. Corporate banking and payments are the same. Retail and SME banking has typically been a local business. Scale matters at the local level. You want to dominate the countries you are in.

Nik Storonsky and Revolut for many years had the vision of being the West’s first real superapp in banking like a WeChat for Europe. They have toned down this superapp vision and there is no evidence of customers buying a wide range of nonbank services on neobank platforms. But Storonsky continues to have the vision of going global and reaching 100 million customers and 100 billion in revenues. Nice round numbers for the marketing team to write up!

Harry Stebbings believes that there will only be a few global players dominating consumer banking a few years from now. But what did surprise me is that TS Anil without being prompted outlined a similar viewpoint to Stebbings. He wants Monzo to be one of those few banks that dominate on a global basis. Time will tell but very little that has happened in the last decade gives us evidence that the regional nature of consumer banking is heading for a fundamental upheaval.

HSBC’s Zing, Wise, and Chase UK

In recent days the fintech community has been looking at the closing of HSBC’s Zing as yet more evidence of banking dinosaurs not being able to innovate. Akila Quinio from the Financial Times reported over the weekend that Zing had fewer than 9,000 active customers in the month before its closure was announced. This is tiny compared to Wise’s more than 10 million customers and the 50 million customers of the strongest of the neobanks in cross-border money transfers, Revolut.

But are incumbent banks always bound to fail versus fintechs?

Cross-border retail payments are a classical case study in Innovators’ Dilemma. An expensive, poor existing product disliked by users. But very profitable and tied deep into a legacy infrastructure of Swift and the correspondent banking network. And the volumes in retail payments are tiny compared to the money banks move in the institutional and multinational space. The additional layer to this is that the banks face much more regulation.

Zing’s failures in terms of lack of differentiation as a last mover are well known. It was stuck in the slow and cumbersome onboarding, KYC, and AML hell of HSBC’s bureaucracy. Transactions had red flags all the time. Customer service was poor compared to fintechs. Speed and pricing were not superior to Wise and Revolut.

By avoiding the Swift system Wise and Revolut can facilitate cross-border payments at a much faster pace than banks. Crucial to this is the scale and scope of operations. Wise has built a huge international network of local bank accounts and direct connections to local payment networks not just in the UK or EU but key remittance nations like the Philippines. This is not easy to re-produce and regulatory permissions can often be a multi-year journey but are key not just to the speed of payments but the amount of money that can be moved in local payments rails. The chart below from Wise’s November 2024 results for H1 FY2025 illustrates the benefits of these continuous investments.

Zing may have cost HSBC $150m but Chase UK has been an even bigger investment for JP Morgan. The bank has invested around $1bn into the business. In the first year after its launch in September 2021, Chase UK lost $450m. Big numbers for anyone but JP Morgan.

But the Chase team got the basics right. They built the business separately with technology from 10x rather than their legacy systems. As a happy customer, I was impressed by the speed and ease of the onboarding and clean user interface. Whether it is sustainable in the long run is questionable, but Chase UK at least had some points of differentiation. I was personally less attracted by the cashback offer but more by the best in the market interest rates on their instant access savings accounts.

I phoned my UK legacy bank providers complaining about their interest rates a few years ago. I was too risk-averse to think about using a Revolut or even deposit-insured Monzo for more than small amounts. But if the house of Dimon goes under we might as well all go back to a subsistence economy. What pushed me over the edge on opening a Chase UK account was that the customer service person at a major UK bank recommended Chase UK and said they were using it. David Velez at Nubank may be the king of referral marketing and Revolut and others following but this was a high-quality referral. I am not sure I would have hired that legacy bank customer service person for the broking desk in my ICAP days!

Chase UK hasn’t outlined financials, and its customer growth has been slow compared to Revolut and Monzo. In its first year, Chase UK added a million customers. The following year it added another million. Now it has reached 2.5 million customers. JP Morgan says Chase UK will hit breakeven in 2025. It has been an expensive product launch for JP Morgan but what makes it worthwhile is that customer deposits at £20bn are similar to Revolut and much larger than Monzo.

Retail banks can innovate sometimes!