Quartz Future of Finance: Metro Bank should copy the Apple Store

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Metro Bank was perhaps the first “challenger” bank. When it launched in the UK about a decade ago, it said it was the first company to get a new banking license in the country in more than a century. Its technology, according to an article in The Economist (paywall) at the time, was going to give it an advantage against established banks.

In 2019, Metro Bank doesn’t look so cutting-edge. Instead of tech, the company made bank branches a defining feature, at a time when most banks in Britain have been closing them as fast as possible. Its strategy is almost the opposite of branch-less upstarts like N26 or Monzo that have put their energy into apps.

I’m not convinced that branches are a bad thing. But it’s worth noting that no industry is copying the traditional retail bank storefront. Instead, maybe these physical branches need a radical redesign.

To be sure, Metro Bank has more to worry about than redecorating: UK watchdogs are investigating an error in the bank’s risk-weighted asset (RWA) calculations. And they are requiring it to raise more funds to meet a rule designed to prevent the government from having to bail out failing banks.

Getting those funds may prove a challenge. Metro Bank was trying to raise as much as £250 million ($307 million) on Monday, but by midday the bond only had orders for around £175 million of it, according to the Financial Times (paywall). “Given the current market conditions Metro Bank has decided to not proceed with a transaction at this time,” a spokesperson said in an email.

Credit: Reuters/Hannah McKay
Credit: Reuters/Hannah McKay

The bank’s eye-opening bond prospectus disclosed that authorities were extending their investigation about the RWA concerns to some senior members of management. Metro Bank’s lawyers disclosed the worst-case scenario—that there could be criminal and/or civil liabilities, and that the company could lose its regulatory permissions.

“There’s litigation risk in the mix, which could potentially pave the way for significant hits to capital,” said John Cronin, analyst at Goodbody.

Metro Bank has a junk credit rating, and the aborted bond offering was marketed at more than 7%, while an existing 10-year bond now yields more than 11%, according to FactSet. Similar issues from Lloyds and Barclays yield less than half that rate.

Keeping investor confidence, maintaining access to funding, and calculating risk and assets properly is pretty much what it means to be a financial company. Metro Bank has a lot to figure out and is looking for a new chairman to help. For now, short-sellers are circling, and the bank’s share price is languishing.

But let’s imagine a best-case scenario, where litigation risk goes away and funding and asset ratios are restored. Does the bank’s business model, which relies greatly on out-of-fashion bank branches, make sense? For what it’s worth, the bank has more than than £13 billion of customer deposits as of July (pdf), and that’s even after £2 billion skittered away after the bank’s accounting snafu. Its deposits dwarf those of (younger) fintech unicorns Monzo, OakNorth, and N26, which together amount to less than £3 billion. And yet Metro Bank’s market value is a fraction of theirs, at £270 million.

Analyst are mixed on whether Metro Bank’s business model makes sense.

Jérôme Legras, head of research at Axiom Alternative Investments, thinks there is “still appetite for human contact.” Branches aren’t necessarily a bad thing, he said, and the key number to watch is the deposit figures. Metro Bank has high costs and needs to grow quickly to make the numbers work. This appeared to be working until the RWA glitch, he said.

Cronin at Goodbody sees things differently: ”It’s a misguided strategy in my view,” he said of the bank’s branches. “The cost base is simply too high relative to the potential scale of the business.”

I’ve been to Metro Bank branches, and they aren’t really my cup of tea. They are a garish bright red and blue, not far off from what you expect from a 1980s fast-food or cinema chain. But they stay open late, which is handy once in a while. Their customer service has been top-ranked among British banks.

Let’s imagine, just for a moment, that maybe branches aren’t such a bad idea, and that Metro Bank didn’t re-invent them enough. The Apple Store concept is a hit that other companies, like Microsoft, are looking to mimic. Even marijuana dispensaries in the US have copied it.

Can you imagine the hype if a fintech like Robinhood or N26 opened an Apple Store-style branch? It might be hard to hire t-shirt wearing hipsters who can explain things like retirement investing, trading, and insurance. And it wouldn’t do much for financial inclusion, since presumably these handful of stores would be located in urban centers that are already well served. But a physical presence and human contact could be psychologically soothing and build trust among certain types of customers.

Many believe the traditional bank branch is obsolete, but perhaps it just hasn’t been reinvented sufficiently.

This week’s top stories

1️⃣ Alibaba finally got approval from Beijing to restructure Ant Financial, clearing the way for an IPO. The Chinese company is looking to swap its right to 37.5% of Ant’s profit for a 33% equity stake, the Financial Times (paywall) reports.

2️⃣ KKR is pushing deeper into investment banking, according to the Wall Street Journal (paywall). The private equity firm has become a global debt-and-equity shop, as it increasingly goes head-to-head with Wall Street banks. It’s helping run the IPO for Endeavor Group, backed by Silver Lake (not KKR).

3️⃣ European banks have announced more than 50,000 job cuts this year, far more than in any other region. The slowing economy and negative interest rates are a major culprit, Bloomberg says.

4️⃣  Beijing has plans to use social-credit scoring for businesses. The government is stockpiling data from things like payrolls, court decisions, and environment records to grade and score companies and the executives operating them, according to the New York Times.

5️⃣ Monzo is looking to reboot its premium service. Take up of Monzo Plus, which charged up to £13 a month, had stalled as the digital bank seeks for ways to boost revenue.

The future of finance on Quartz

Predatory lending is on the uptake across Kenya. Google has updated its app store policies to discourage lending apps that have pushed tens of thousands of users into debt.

Payments generate more revenue in Asia Pacific than Europe and North America combined. McKinsey expects global revenue to grow at about 6% per year, reaching $2.7 trillion by 2023.

Citadel hired machine learning star Nicolai Meinshausen. Besides presumably making lots of money, the trading industry offers academics something university life can’t: immediate feedback on whether their ideas work or not.

This week Quartz published a deep dive on 5G for members. The insanely hyped tech will underwhelm for years, and then pay off in ways we can’t predict once millions of machines are chattering with each other wirelessly. If you’re not yet a member, get 50% off with promo code JD2912.

Always be closing

  • Business-to-business payments company Fundbox raised $176 million in equity and got a $150 million credit facility.
  • Mercury raised $20 million. Investors in the bank software maker include Charles River Ventures, Andreessen Horowitz, Will Smith’s Dreamers Fund, and Kevin Durant’s Thirty Five Ventures.
  • Fidel got $18 million in funding. Investors in the UK-based card payment data company include Citi Ventures and Royal Bank of Canada.
  • TransferWise partnered with US banks Novo and Stanford Federal Credit Union.

I hope your week has been a profitable one (pick your own metric). Please send money-transfer hacks, tips, and other ideas to jd@qz.com.