Despite Metro Bank’s tenth birthday just five months away, new chief executive Dan Frumkin didn’t appear to be in the mood for celebrations in late February.
Given the job on a full-time basis just a week earlier, having run the bank on an interim basis since January, one of his first acts was to detail to investors a truly horrendous year, which saw it lose £130.8million.
And Metro Bank’s network of 77 branches, or ‘stores’ as it labels them, which had been its physical embodiment and calling card for the almost 10 years it had existed on Britain’s high streets, were also in his crosshairs.
Smaller branch plans? Heather Small, lead singer of the 90s band M People, at a ‘party’ to celebrate the bank’s tenth birthday
The branches ‘consumed capital and were a driver of fixed costs’, Frumkin wrote in a presentation to investors, they were ‘too large’, ‘not efficient’, had ‘high fit-out costs’ and ‘long leases, often without breaks’, and were ‘expensive to close’.
Frumkin, described as a restructuring specialist with a background at Royal Bank of Scotland and Northern Rock, appeared to forecast a very different future for the bank.
Plans to pour millions of pounds in hundreds of new branch openings were shelved, and instead he pledged a return to ‘sustainable growth built around a community banking model.’
But with the bank turning 10 this July, can Dan Frumkin restore Metro to profitability, and more fundamentally, does a bank built around large, expensive branches have a future in an increasingly online age?
The first bank in town and the banking ‘revolution’
Britain’s first new high street bank in 150 years was always going to attract attention.
But Metro Bank’s enthusiastic American co-founder Vernon Hill did his best to up the ante.
The opening of its first branch in Holborn, London, on 29 July was the start of a ‘revolution in the banking business’, he said.
Metro Bank co-founders Anthony Thomson and Vernon Hill at the opening of Metro Bank’s first branch in London on July 29, 2010
The bank would have 200 branches in London alone by 2020, they would be open seven days a week with long hours, they would be dog friendly, and would let customers open accounts in just 15 minutes.
And those branches would be big, airy, spacious and bright, more akin to department stores than traditional bank branches.
‘We believe customers simply want a better experience from their bank, the kind they typically get from a great retailer and that’s what we intend to give them,’ fellow co-founder Anthony Thomson told the BBC on day one.
And in many ways, it succeeded. Customer satisfaction has always been high, and its offerings have always been competitive, if not the best.
Hill and Thomson said the bank, modelled on American fast food chains, retail stores and Hill’s previous venture Commerce Bancorp, would launch a ‘revolution’. It was Britain’s first high street bank in 150 years
Current account rankings from the Competition and Markets Authority have been published four times since August 2018, and Metro Bank has ranked second, first, joint-first and second, jostling with ever-reliable HSBC offshoot First Direct.
Its online offering has also consistently scored well, despite its branch-centric brand.
How does Metro Bank rank for service?
In the latest Competition and Markets Authority results for personal banking published in February 2020, Metro Bank ranked:
– Second for overall service quality
– First for online and mobile banking
– Second for overdrafts
– First for in-branch banking
And for business banking:
– Second for overall service quality
– First for online banking
It has around 2million personal banking customers, up from 200,000 total accounts in 2013 and half a million five years ago, who each kept roughly £2,150 in their accounts last year, although deposits were down nearly a tenth.
It has always paid fairly attractive rates on fixed-rate savings products compared to banking rivals, and offers fee-free debit card spending and cash withdrawals in Europe, although before 2014 this was the case worldwide, which hooked in plenty of customers.
‘If you look at it from a customer’s perspective there’s nothing not to like about Metro’, Frumkin told This is Money.
‘There’s the odd story here and there, we don’t get everything right, but the reality is the core ethos of seven-day a week banking is truly differentiated in the market.’
But one reason for that is that even in 2010, Britain’s biggest banks were already planning on moving away from thousands of branches nationwide, a trend which has become even more pronounced.
In the last five years, 3,588 bank branches have closed, according to Which?, and the new wave of challenger banks like Monzo and Starling have signed up millions of customers without bothering with a single branch.
Customers and employees inside the bank’s first branch in London on opening day. Metro has bet big on big high street bank branches, at a time when the rest of the banking sector was running away from them
‘Opening 70 plus branches in 10 years while the rest of the industry couldn’t close outlets quick enough has always been a strategy that I’ve struggled to get my head around’, Andrew Hagger, industry expert and the founder of personal finance site Moneycomms, said.
‘Its customer service is top notch and both business and personal customers no doubt like the flexibility of 8am to 8pm seven-day opening, but again that’s an additional large overhead.’
Frumkin admitted the bank ‘hadn’t been able to monetise’ the branch-first model but asked whether he believe the bank made a mistake in following that route, he remained firm.
Hill initially claimed the bank would have 200 branches in London alone by 2020. It currently has 77, and plans to drastically slow the rate of branch openings to cut costs
He said: ‘Had Vernon known we were going to have a Bank of England base rate of 0.1 per cent, would he have made different decisions?
‘Probably, because this rate environment’s really difficult for a retail bank. I think he thought we would have a normal rate environment, and if the base rate were at 2.5 – 3 per cent, we really wouldn’t be talking about the size of the stores. We’d be making enough money.’
He added: ‘I think stores are a big part of how you build a bank. I’m not aware of anywhere in the world, including Asia, where a digital bank has become a full-service challenger to the incumbent banks.’
‘The number you need we could debate… I don’t think you need the density the bigger banks have, but I do think the stores are a physical representation of our service proposition, of the brand and of our culture. So we do need them.
‘If you look in a five-mile radius around the stores, digital account opening, digital activity increases dramatically. It becomes a beacon for what Metro Bank is.’
Hill stepped down from the bank in 2019 after a truly horrendous year which saw it eventually record a £130.8m loss
‘We can’t move away from who we are’
But successful customer service or not, the conversation is about the size, and cost.
It’s an issue exacerbated by the coronavirus, which has led to a surge in online banking and banks reducing, rather than extending, their opening hours.
And as Frumkin’s February presentation made clear, cost-cutting is high on the agenda after its annus horribilis.
The bank was investigated after it was revealed in January that it had misclassified the risk of around 10 per cent of its loan book, which left it needing to raise £375million from investors.
It had to pay investors 9.5 per cent interest to swallow a £350million bond issuance in October, it lost its chief executive, and it lost Hill, its driving force, chairman and co-founder.
New Metro Bank chief executive Dan Frumkin started in January, and has a job on his hands to right the ship
And this year it handed back £50million it was awarded as part of a £120million package to boost its business banking offering.
After the £130.8million hole it has found itself in, Frumkin admitted there was a question of whether ‘Metro’s business model was so flawed that it should not remain as an independent bank and we should sell it’, but believes there is a road back to profit.
But that road is not lined with hundreds of new bank branches, with the bank slashing new openings from 71 to 24 over the next three years and, importantly, saying they would be smaller.
Instead, the bank will focus on growing customers around its existing branches, focusing on current account deposits at the expense of fixed-rate savings accounts, and diversifying its lending beyond mortgages, which made up 71 per cent of its lending in 2019, evidenced by the fact it is reportedly in talks to snap up the unsecured lending platform RateSetter.
‘The things we’re not very good at is unsecured personal lending’, Frumkin said, ‘overdrafts aren’t very good, small business lending isn’t very good, we don’t have an insurance product.
‘One of the dafter things I’ve said, is people go and buy insurance for their safe deposit box at a different insurer and they’re in our vault. Shouldn’t we do that?’
|Year||Metro Bank one-year bond rate||Best buy rate||Market average rate|
|Source: Savings Champion (figures correct as of 24/7/2020)|
Not everyone is convinced. The share price remains stubbornly low at around £1.13, far below its peak of around £40 in 2018, and analysts are sceptical about the bank’s prospects.
‘Retail banking remains very low margin at a time when even the share prices of the big four UK banks are also at quite depressed levels’, Michael Hewson, of CMC markets, said.
|Year||Metro Bank one-year Isa rate||Best buy rate||Market average rate|
|July 2013||2.25%||2.05% (Non-Metro rate)||1.83%|
|Source: Savings Champion (figures correct as of 24/7/2020)|
John Cronin, an analyst at the broker Goodbody, said: ‘The business model can work if it can recycle the deposits it gathers through its very costly branch network into higher-yielding loan assets.’
But, in a briefing note recommending investors sell, he wrote: ‘Given its loan mix and substantial inflexible fixed cost base, there is no line of sight on profitability with base rate now sitting at just 0.1 per cent’.
More than £7 in £10 lent out by Metro Bank last year was to mortgage borrowers. Its route back to profitability hinges on boosting more lucrative personal and business lending
But for all the talk of a future ruled by smartphone banks, Frumkin is adamant Metro Bank’s branches are likely to be a fixture on Britain’s streets for a long time to come.
And not just because it can’t get out of the leases.
‘All the bits that we do well, local business managers, extended opening hours, dog friendly stores, all of that is still going to be who we are’, he said. ‘We can’t move away from that.’
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