Challenger J-Curve business model ultimately leads to “conduct problems”

By David Beach | 16 January 2019

The mentality of racking up overheads in order to acquire customers leads banks to act on their own and not the customer’s best interest later down the line, says Andy Mielczarek, CEO of Chetwood Financial, the new challenger and lender.

“When I reflect on the 2008 crisis and the mis selling and position of banking in the UK, it started with an idea that banks have spent all this money acquiring customers and they must be paid back somehow. That mentality caused the banks to offer the second, third and fourth product that’s never as good value as the first,” says Mielczarek.

According to a 2017 YouGov survey, only 36% of British consumers trust banks to work in their customers’ interests while 55% do not trust banks to do so.

The Wrexham-based firm operates both Chetwood Financial – the lender - and Yobota, a technology platform designed for financial services. The company entered the mobilisation stage of their banking licence application and started lending under the brand LiveLend in February 2018. The firm exited mobilisation before Christmas 2018 and will begin taking deposits early this year.

The two founders, CEO Andy Mielczarek and COO Mark Jenkinson, initially got the firm rolling with their own money in 2016 followed by £3m raised from  investors. In February last year, Chetwood agreed to a £150m commitment from major shareholder Elliott Advisors.

“What we didn’t want to do, having spent a year ourselves raising money, was having to go on roadshows every few months to raise a few million quid, detracting our focus. The beauty of Elliott is they’re patient investors”, says Mielczarek.

Chetwood enters an already crowded challenger market, something Elliott is not concerned about, says Mielczarek.

“I was visiting Yobota and I had to chuckle to myself when I saw three buses go past, with Starling, First Direct and Monzo advertising. We’re not in the business of knocking, and Monzo has done a great job catering to their target customer, but it’s an awful lot of the same old business model behind different logos and different colours,” says Mielczarek.

And starting off with a lending product was no accident, according to Jenkinson.

“We started out in lending because it has its own revenue and is less complicated than other products. Challengers jumped straight into owning customers,” he says, “and creating digital marketplaces, partly because it’s an easier technology space to play in.

“In consultancy circles, we certainly talked a lot about the Amazon of banking. It’s difficult to tell who will win but there will always be marketplace companies and they will always require products; our philosophy is let’s be that product manufacturer and put those products on the shelf. Let’s go somewhere where someone else isn’t,” says Jenkinson. 

The LiveLend product is currently rolled out on ClearScore, a company that offers free credit scoring and can be seen as an evolution of the price comparison sites, according to Mielczarek. 

“Someone like ClearScore is very good at acquiring customers, identifying people who want loans and what we’re able to do on top of that is pick slices of that market and do a better job for the customer at a better rate for us, without having to lose money on the rest of it,” explains Mielczarek.

Chetwood has been designed to sit behind consumer-facing brand and focus on offering the best deal possible for customers, an opportunity Mielczarek believes is lacking in the current climate: “The market in general is advertising 2.8% typical APR and then up-pricing the other half of the books to get an average 8-9% APR.

“We’re able to say that we won’t lend below 7% and that we’ll just deal with near prime customers who are being overcharged. Those customers believe the advertisements that tell them they need to have the lowest typical APR, that becomes a loss leader, that requires cross subsidy. Our digital evolution means we don’t need to do the cross subsidy, and we make a good profit and a better deal for the customers who are being used to subsidize those teaser rates,” he explains.

The LiveLend personal loan product currently offers personalised APRs ranging from 9.9% to 36.7% with a representative 14.9% APR.

It is here that Chetwood, through LiveLend – and their reward loan product that adjusts rates based on quarterly credit scoring - hope to make a difference as a manufacturer of banking products, by leveraging Open Banking.

“We’ve been talking to neo-banks like Monzo and N26 who should be able to send us highly qualified customers that would allow us to make very good credit decisions. The purpose of our model is to put the product in the customer’s hands and work with whichever digital winner has got that customer and the knowledge of their need,” says Mielczarek.

But Open Banking has had a rocky start to life, with consumers concerned over data sharing, it becomes a challenge to convince customers to use a product which relies on voluntary data sharing, such as LiveLend.

“Behavioural economics states that if a customer can see the direct benefit of sharing their data, they’re going to engage much more positively,” says Mielczarek, “if we promise to take 5% off a customer’s loan rates simply by pressing a button, they’ll engage far more positively.”

The ability to continue offering the “best possible” product, which will supposedly convince customers to hand over rich data, ensures the long-term scalability of the company in a way that challengers are failing to do effectively, says Mielczarek.

“The path to profitability for us is a lot clearer, we just need to do more of what we're doing today. Every single one of our customers generates revenue that is greater than the cost we invested.

“Many of the other neo banks don’t even generate revenue and that leaves the question of how those business models will monetise customers later on. Ultimately, we feel that it causes conduct, customer and brand problems later on because you’ve got to do something to extract money from your customers,” says Mielczarek.

Become a bobsguide member to access the following

1. Unrestricted access to bobsguide
2. Send a proposal request
3. Insights delivered daily to your inbox
4. Career development