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Metro Bank on negative watch rating

5 October 2023

Rating agency Fitch cites one of Metro Bank’s risks as its business model. At its launch in 2010, many analysts questioned whether a branch-centric challenger bank was the right model to compete with the UK’s ‘big four’ banks.

The term ‘challenger bank’ was coined to describe any bank that is seeking to challenge traditional banks. In the context of the UK, that means the ‘big four’, namely Barclays, Lloyds Bank Group (including Lloyds Bank, Halifax and Bank of Scotland), HSBC (that acquired Midland Bank) and NatWest Group (which includes NatWest, RBS and Ulster Bank). Together, these banking groups control 77% of all the UK’s current accounts. The market share of the largest bank, HSBC, is around 4.5 times larger than Lloyds, the second biggest bank.

Another term sometimes used for a challenger bank is ‘mobile bank’ or ‘digital bank’, the reason being that the market generally associated challenger banks as being online-based branchless banks. Examples are Monzo Bank and Starling Bank, which launched in 2015 and 2017, respectively. Both these banks have UK banking licences. Other challenger banks, such as Revolut and Monese, do not have UK banking licences and are generally referred to as ‘fintechs’, which has become a generic term to describe a business that uses technology to deliver financial services and products to consumers.

According to Which? banks and building societies have closed 5,628 branches since January 2015, which represents over 50% of UK branches that were open at the start of 2015. NatWest has closed 1,296 branches, followed by Barclays (1,093) and Lloyds (1,002). The rate of closures peaked in 2017 (867 branches), but they continue at some pace with 662 closures in 2022 and 455 closures already this year. A significant number (nearly 100) have already been scheduled to close in 2024.

Some banks have called it a day with branch banking, including M&S Bank, which closed all its in-store branches in 2021. The hardest hit part of the country (again according to Which?) has been the South East with 783 closures and more scheduled to close. The South East is the region that has been the focus of Metro Bank’s branch expansion.

Metro Bank was granted its UK banking licence in 2010, the first such high-street bank to be granted a licence for over 150 years. Opening its first branch in Holborn in July 2010, the bank’s initial objective was to have 200 UK branches open by 2020. To date, Metro Bank has 76 ‘stores’ and seems unlikely to expand significantly, if at all, without further funding. The founders promised a banking revolution based on large, spacious branches on prominent high-street locations and strong customer service. The bank has generally scored well for customer service, but doubts remain as to whether its branch-centric model will ever be profitable in this increasingly online age.    

Whilst Metro Bank has built up an impressive 2.7 million customer accounts, the new wave of digital challenger banks, such as Monzo and Starling, have signed up millions of customers without opening a single branch. There are arguments that a digital bank may not be able to become a full-service challenger to the incumbent banks with physical branches. However, the cost of maintaining expensive branch networks has driven the larger banks to make drastic cuts.

As a piece of McKinsey research a few years ago stated, “The emphasis on cost-cutting following the global financial crisis has created a dilemma for banks: optimize branches to gain a competitive advantage with customers or lean more heavily on less-expensive digital channels and lose their distinctiveness compared with online institutions and other digital attackers”.

Metro Bank, unlike its established rivals with stronger balance sheets, needs additional funding in order to continue its strategy of building a profitable business through its expensive branch network. Without having the financial stability and longstanding track record of the traditional banks and without the substantially lower cost base of the online challenger banks, Metro Bank may continue to struggle to fulfil its commitment to “providing customers with unparalleled levels of service and convenience”. Investors wait nervously to see whether its branch-centric model will survive.