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S&P Global - 2 new UK digital banks take aim at profitable 'mass affluent' market

Updated: Oct 30, 2020



Two new digital banks, Pennyworth and Monument, are preparing to launch in the U.K. Rather than competing with existing challengers, such as Revolut Ltd., Monzo Bank Ltd. and Starling Bank Ltd., who have gone after a broad swathe of the millennial and gen-Z market, Pennyworth and Monument say that they are taking aim at the "mass affluent" or "aspiring affluent" demographic, a segment that has been almost exclusively the preserve of big banks up until now.


Definitions of what constitutes "mass affluent" vary. Accenture recently suggested that they are members of the middle classes who have between £100,000 and £1 million of investible assets, with around 6 million households in the U.K. falling into this category. Management consultancy Sia Partners categorizes them as those with €50,000 to €1 million in liquid assets. Either way, it is a particularly lucrative demographic for banks, with Deloitte estimating that mass affluent customers can make up 80% or more of the net income generated by retail banks.


For Kate Moody, lead customer strategist at 11:FS, a fintech and banking tech consultancy, these two newcomers could be a pose a direct challenge to incumbent banks.


"To date, the majority of new entrants have focused on the everyday customer and the smaller end of the business banking market," she said. "The 'mass affluent' market that these new entrants have set their sights on is still really the mainstay of the traditional big banks. If they can create propositions that are finely tuned to the particular needs of this group, then the big banks will want to keep a close eye on them."


Lucrative customers


Pennyworth started its pre-application for a banking license from the U.K. Financial Conduct Authority in March. Its starting point is customers with investible assets of £40,000 or an annual salary of £40,000, said CEO Jeremy Takle. They will mostly not have enough money to qualify for private banking, and usually bank with one of the big five lenders, where they have "expensive accounts and poor customer service," he told S&P Global Market Intelligence.


This captures slightly less wealthy customers than the premium offerings of the U.K.'s largest banks. The minimum annual salary for premier accounts with both Barclays PLC and HSBC Holdings PLC is £75,000, for example.


Monument is going after a wealthier customer base than Pennyworth — those with investible wealth of £250,000 to £5 million, excluding their home, according to Chief Commercial Officer John Saunders.

These clients are eligible for premium banking, but feel under-served by large banks, according to Saunders.


"Premium banking is premium in name only," he told S&P Global Market Intelligence.


Monument, which got its banking license earlier in October, has raised around £20 million so far from an investor base of private high-net-worth individuals, Saunders said. As well as wealth management, the bank will provide loans for real estate — particularly the buy-to-let market — and invoice financing, with a view to growing a loan book to "single-digit billions" in the next five years, Saunders said.


But there are two other things that both have in common. First, neither will offer a current account, instead allowing users to "plug in" to offerings such as savings accounts and financial advice using Open Banking, which grants companies access to banking customers through third-party applications.


"We have no plans to offer current accounts. They are one of the most entrenched products," Monument's Saunders said.


For Pennyworth's Takle, it does not make sense to try to offer a current account in the current market.

"Neo-banks are already battling for current accounts, when switching often feels like a lot of effort for the customer," Takle said, adding that the bank will "curate" wealth management and loan offerings that customers can access via an application programming interface, the piece of technology at the heart of Open Banking.


Secondly, both banks are clear that they wish to start making a profit quickly, in contrast to Monzo and Starling, which have yet to announce their first profits.

"We don't believe in having lots of customer relationships that remain loss-making for a long time," Takle said.


Monument's Saunders said the bank aimed to become profitable within two years.

"Both Monument and Pennyworth are coming to market with a specific focus on a customer group that they're confident offers a faster route to profit, which they clearly see as an area where Monzo and Starling have fallen short," said 11:FS' Moody.


"It's interesting that Pennyworth in particular have stated upfront that they're not interested in chasing a main account status. The competition going forwards is going to be much more focused on winning customers over with specific saving and lending products, rather than day-to-day banking services."


Banking insiders


The management teams of both Monument and Pennyworth are drawn largely from wealth management backgrounds, mostly at big banks. Saunders joins from Deutsche Bank AG's U.K. wealth management business, of which he was COO, having previously held managing director roles at Coutts, NatWest Group PLC's wealth management and private banking arm, and Barclays Wealth Ltd. Monument COO Steve Britain's experience includes a 13-year stint at HSBC, some of which was spent in the bank's U.K. wealth management business.


Pennyworth's Takle previously worked for Barclays in the U.S., where he was one of the executives charged with setting up a digital challenger bank — a plan killed off by CEO Jes Staley in late 2019.

Takle said he is more confident setting up a bank for the mass affluent as a stand-alone entity, rather than from inside a big bank.


"It's very difficult to set up a challenger bank from within a large bank. You need agile, interdisciplinary teams that are not in silos," he said.

By Sophia Furber

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