The consolidation of mid-sized challenger banks will likely ramp up in 2024 and more lenders will start winding down, the chief executive of digital bank Cashplus has told City A.M., as the market becomes increasingly crowded.
Rich Wagner added that legacy banks are experiencing a “brain drain” as their digital-only rivals poach top talent.
Wagner is in his 20th year as chief executive of Cashplus, which launched in 2005 and secured a full banking licence in 2021, mainly serving microbusinesses and smaller SMEs.
“20 years ago, when I started this business, there were nine major banks in the UK,” Wagner noted. “There are over 500 banks now.”
Analysts have predicted that the UK’s mid-sized banking market is in store for a wave of consolidation as higher interest rates put more pressure on funding costs and successful challengers are now flush with cash.
In the last two months alone, Coventry Building Society has entered exclusive talks to potentially buy the Co-operative Bank, while Sainsbury’s is shuttering its banking division and Tesco Bank has reportedly put itself up for sale.
“You’re going to see more consolidation in 2024 than even 2023,” Wagner said. “I think people will narrow the difference between the bid and ask price. A lot of transactions fell through the cracks in 2023 because there was such a valuation gap.”
He added: “You will see more people going quietly away because they couldn’t sell themselves – the existing investor didn’t want to put anything in and they couldn’t get the profitability soon enough to comfort the regulator.”
As well as a surge in the number of fully licenced banks following the financial crisis, the Financial Conduct Authority has also given out hundreds of electronic money institution (EMI) licences for young firms to challenge incumbents.
Wagner was blunt on these new players. “Some of them will be successful, most won’t.”
Another side effect of greater competition in the sector and the explosion of digital lending is a “brain drain”, he said.
“There are skills gaps that big banks can’t fill because if you’re really good you can find a digital bank that’s much cooler, probably will pay you more upside on the share options, and you will just move from a very boring bank. So there’s a big brain drain going out of those organisations.”
Cashplus, which reported record revenues last year, is planning a major rebranding in the coming months that will see the firm drop its name.
Wagner said “Cash” was “probably a bit outdated” but gave few hints on the new name or logo.