Pressure is increasing on those challenger banks relying on venture capitalists and crowd funding, which will reach a “crunch point” in the next five years as the need to become profitable increases, according to Amir Nooriala, COO, OakNorth.
“As of January this year there are about 300 unicorns, privately held. Out of 300 how many of them are profitable? Around two dozen, that’s it,” said Nooriala at the PAY360 conference in London this week.
“There is a lot of money going in - venture capital, crowd funding. I’d say in five years there is going to be a crunch point, and they will need to start making money. So, the first point is that there will be a lot of pressure to acquire, merge, or consolidate,” he said.
“If you look at every different sector you get these charts that say, fintech, insurtech, whatever other tech you can put on it, there is probably too many on top of all the incumbents that are there already. There is going to have to be some rationalization to happen,” said Nooriala.
On a panel discussing how to ensure longevity as a leading challenger bank, Julian Sawyer COO at Starling bank agreed the banking landscape will have significant changes in the next two years resulting in larger but less challenger banks.
“How I see the market is that there will be a first division of challenger banks. And there will be a second division where people are not getting that scale, which is required to make them profitable,” said Sawyer.
“Overall it is not about will the challenger banks survive, it’s who will succeed. And I think that is a fundamental shift that has happened in the last 12, 24 months,” he said.
On the sidelines of the conference, Soren Rode Andreasen, chief digital officer at Danske Bank, said that if challengers want to become profitable it is necessary to move into the lending market.
“All the challenger banks do the easy stuff because it is easy.”
“Where the money is, is in lending. It’s not in having a flashy card, it’s in mortgages, it’s in business lending, it is in the interest-bearing products, but that is also the hard stuff.