FROM providing bone-shaped dog biscuits and water bowls in its snazzy, brand spanking new branches, to opening seven days a week and setting up customer accounts in less than 15 minutes, Metro Bank is clearly going to great lengths to distance itself from the old and largely discredited banking system it has promised to shake up.
Founded in 2010 by Vernon Hill, a US financier, Metro Bank was launched as a challenger to Britain’s quartet of established lenders, two of which – Lloyds Banking Group and Royal Bank of Scotland – needed to be bailed out by the UK taxpayer. And although it was conceived before the financial crash hit in 2008, Metro has undoubtedly benefited from the government’s desire to see more competition in the sector.
The start-up is based on a vision to create a high-street bank committed to superior service and a more open customer experience. Its offering ranges from the practical – 8am to 8pm branch openings – to the bizarre – its focus on being a dog-friendly bank includes offering a selection of canine goodies to customers’ pets.
Metro’s offbeat approach to service could seem gimmicky, but Michael Brierley, its chief financial officer, says there is a financial case behind the novelties. For instance, Metro is one of the only banks to provide access to in-store safety deposit boxes. The boxes, which cost from £120 to £480 a year, are available in all stores and often sell out before the branch has even been opened.
“Certainly, for our suburban stores [the deposit boxes] cover the cost and rent of the stores,” Brierley tells Financial Director on our meeting at the bank’s first ever branch in Holborn, central London.
Whether gimmicky or not, the lender, which became Britain’s first new high-street bank in more than 100 years when it opened, has experienced rapid growth in the four years since its launch. According to its latest quarterly results, customer account numbers have hit 359,000; total deposits have grown to £2bn – up 125% year on year – while its loan book has reached £1.9bn.
“We have seen immense growth and have reached a £2.8bn balance sheet from zero in four years,” says Brierley.
Show, don’t tell
Like the balance sheet, Brierley – who joined the bank in 2009 from Barclaycard where he was responsible for the development of risk management policy and strategies – has had to build the business, its back office and its finance function from scratch. As the “third person to have their name on the door”, one of the first systems to set up was payroll. “It’s a pretty poor CFO who doesn’t figure out he needs to get himself paid,” he jokes.
Joking aside, when he arrived at the bank, it didn’t exist. Even the most basic elements had to be set up and applied for, such as registering for VAT and corporation tax. “We were a company before a bank,” he says.
In addition to putting the basics in place, Brierley had to raise the first round of start-up capital – about £75m to get the first two branches up and running with some financial wriggle room – and get authorisation from the Financial Services Authority, since replaced by two new regulatory bodies: the Prudential Regulation Authority and the Financial Conduct Authority.
Getting approval from the FSA meant jumping through some regulatory hoops, with the executive team vetted by the FSA as being fit and proper and capable of running a financial services company. At the same time, the bank’s operations and business plan were scrutinised. Having previous experience of helping set up Capital One Bank (Europe), where he held senior finance and risk roles between 1999 and 2006, proved invaluable.
“I had sort of done it before [at Capital One Bank]. That was immeasurably valuable … knowing some of the pitfalls and what was important,” Brierley explains. For instance, banks had come in for flak over their corporate governance failings – as such, the team needed to demonstrate the “huge levels” of care that had been taken.
“Long before authorisation, I set up and sat on our risk committee. The liability committee was sitting nine months before authorisation was granted,” Brierley says, adding it was a case of “show, don’t tell” when complying with the watchdog’s due diligence.
When Metro launched, the decision was taken to set up a back-office system that would take it through the first three years of growth, rather than implement a fully integrated and scalable system from the outset, Brierley says.
The systems had a shelf life. According to Brierley, he needed to make a “pragmatic decision” over what the business needed in its early life, taking into account cost, time and effort. “Did we know what we needed? Did we need systems to last 20 years? We were pragmatic. We are now replacing our management information systems with industry-strength tools,” he says.
However, Metro’s customer-focused back office is highly advanced. One key difference between Metro and its rivals is that customers can walk in the store, open an account, and, within 15 minutes, leave with account set up and debit card ready to use.
Not only is this a simpler, joined-up system – some banks run as many as 20 different IT systems for dealing with accounts – it also reduces costs. Like the deposit boxes, this funds the stores and makes them efficient.
“What would be back-office fulfilment in other banks, we do in store,” explains Brierley. “Doing that back-office fulfilment in store makes economic sense for us.”
Path to profit
Metro now has 27 stores open, with a further six under construction. Stores including Wood Green, Basildon, Orpington, St Albans and Cambridge are due to open later this year. Each branch – or ‘store’ as the bank prefers to call them – costs a minimum of £2m to build, and will need £20m to £30m of deposits to underpin its lending operations.
According to the bank, capturing as little as 5% of the local banking market with each branch will deliver enough customers to support its lending. Brierley says performance is tracked at an individual store level, with finance receiving reports on the individual costs, deposits of each store and what they contribute to overall overheads.
“We track profitability on a store-by-store basis. You can see and make changes to the way individual stores work,” he explains.
The bank plans to have 200 stores by 2020, mainly saturating the Greater London area. Even at that scale, Metro will still be some way from challenging the established order. According to the British Bankers Association, challenger banks account for just 2% of total deposits and 2.1% of loans, while Lloyds has as many as 22 million current account holders. At the same time, Metro still has some way to go before it will turn a profit for the first time. Post-tax losses narrowed to £9.9m in the second quarter from £12.4m in the same period last year, though Brierley believes the bank is on track to make a profit in 2015/16.
“If we stop investing, we can be profitable tomorrow,” he says. “That would be foolish. We will generate a greater long-term profit if we continue to invest in our infrastructure, IT and people.”
Technological innovation – and investment – remains central to the bank’s approach. In the second quarter, new technology was introduced to allow customers to complete their account opening process electronically, by signing on a tablet and having their paperwork emailed to them, rather than walking away with paper to file. In addition, personal customers are now supported by a mobile channel, which allows them to conduct their banking through their mobile smart phone.
“One thing I learned at Capital One is that it lost money to begin with and made money in the end. It lost because it invested in the future,” says Brierley. “It starts with having long-term investors that understand the original business plan. They understand we need to invest. They can see the power in the model and that it will deliver a return.”
Indeed, private and institutional investors remain keen to snap up the bank’s stock. In January, Metro announced it had raised £387.5m in a capital raise of common stock in order to fund its expansion plans. The latest raise, which had a share price at a 30% premium on the previous capital raise in June 2012, brings the total equity capital raised by the bank to £641m and that capital will support the expansion of the bank’s retail, commercial, and private banking businesses. Following the completion of this offering, Metro Bank has a leverage ratio of 25% and Tier 1 capital ratio of 63%.
According to the bank, it had originally targeted £250m and could have raised about £500m because of the strength of interest from investors in the US and UK. The capital raise also meant the bank postponed plans to list on the stock market for two years, while it looks to maximise value for investors.
“We always knew we would need more capital because of our growth. When we went to investors, we said we could IPO, but they said, ‘We will invest – how much do you want?’” Brierley says. “In the long term we will do an IPO. We are destined to list.”
The bank already has many of the essentials – such as reporting under IFRS and using a Big Four auditor – in place. “IFRS is absolutely in place; we have got ahead of the game,” Brierley concludes. ?
According to reports, the lender was forced to move oversight of its risk division away from Meddings following pressure from the Bank of England’s financial watchdog, the Prudential Regulation Authority, which is understood to have told Standard Chartered it was “not happy” with Meddings’s role.
A source with knowledge of the talks between the PRA and Standard Chartered told The Telegraph that the regulator was concerned about the potential conflict between Meddings’s finance responsibility and his duty to oversee the risk operations. “When I first arrived, I was both people. That can work as a small proto bank, but the roles are different and they should be separate,” he says. “There is overlap and the CFO and CRO must work closely together.”
IN BLACK & WHITE
2009 – present CFO, Metro Bank
2009 – 2010 CFO & CRO, Metro Bank
2008 – 2009 Director business risk, Barclaycard
2002 – 2007 CRO, Capital One Bank (Europe)
1999 – 2003 CFO, Capital One Bank Europe
1996 – 1999 Head of financial control, Industrial Bank of Japan
1984 – 1993 CFO, Royal Trust Bank