Page 28 - Bridging & Commercial Magazine Issue 5
P. 28

 According to our funding research back in January, the retail deposit model—a funding source that is regarded as one of the cheapest and most resilient—accounts for just 18% of the bridging market, offering the banks an expense will be felt by new entrants still establishing their brand, such as Recognise. While retail deposits may be seen as the holy grail, many deposit- funded businesses, such as Masthaven, are diversifying their funding. Masthaven holds £377m in retail deposits and, earlier this year, boosted its coffers with a £60m equity investment from Värde Partners. The bank told me that diversification was required for its plans to scale and grow further into other markets, and a way of managing or reducing risk and increasing optionality. Hodge Bank, which is almost completely deposit funded, is also diversifying. David Landen, finance director at Hodge Bank, claims that increasing competition in the retail deposit space has led it to look at wholesale markets, too. HOW CAN BANKS ATTRACT DEPOSIT SAVINGS? A number of the banks I spoke to assert that having their ranking in the upper echelons of the best-buy tables is a key strategy for attracting savers. The further up the rate table you move, the more money you are likely to get. Not unlike the bridging market, the rest comes down to quality of service, targeting niches and innovative products. Hampden & Co, a private bank which offers bridging, obtains its retail deposits by providing a high-end service exclusively for HN W individuals. “ We attract client deposits by offering a personal, tailored banking service that many HNW individuals are seeking, so advantage over competitive and profitable, in today’s market, can retail deposit funding make a lender? Jon Hall, managing director at Masthaven, explains that becoming a bank enabled the lender to offer more attractive bridging rates. “We are able to price competitively on the savings side, still deliver strong returns in lending and provide a more cost-effective solution in bridging.” In a quest for similar results, Castle Trust and Recognise Financial Services are currently in the process of becoming banks. Jason Oakley, CEO at Recognise, expects its move from wholesale to deposit funding to increase its profit margins. “We want to optimise how much it costs us to bring money \[in\] to ultimately lend out.” Jason confirms that, once licenced, he anticipates that its deposits will facilitate the overwhelming majority of its funding thereafter. Jonathan Thompson, founder and CEO at B-North—which is striving to become a bank from scratch and aims to offer bridging—claims that retail deposits will allow it to “compete across most aspects of the market”. However, aggressive interest rate competition in the savings account market suggests that it could be becoming more difficult for smaller and lesser-known challenger/specialist banking brands to attract customers the major ity. Yet, how muc h more cost effective, and their deposits. Even with challengers offering higher savings rates than their established rivals, a Flagstone study shows that they are struggling to break the big five’s (Barclays, HSBC, Lloyds, RBS and Santander) hold over the retail deposits market—which, in total, is worth around £1.5 trillion. For example, Shawbrook Bank, at the time of writing, offered an attractive easy access savings rate of 1.48% AER, while Barclays offered just 0.25% AER. However, the latest reports show that the former has £5bn worth of customer deposits, compared with the latter’s £197.3bn. Easy access savings account Marcus by Goldman Sachs launched in September 2018 and posted late last year that customers were signing up at a rate of one every 35 seconds. With an offering of 1.50% AER (including a bonus rate of 0.15% fixed for the first 12 months), Marcus has already attracted £8bn of customer deposits, proving that savers will move to other banks for better rates, but perhaps not as fast without a widely recognisable brand behind it. Charles McDowell, managing director at Hampshire Trust Bank (HTB), adds that increasing competition in the savings market may have watered down the funding benefits of retail deposits. “Historically, the financial benefit was always there. It is not there anymore, at the moment.” Jon emphasises that the cost and reliability of deposit funding may be one reason to go through the bank licencing process, but it is not a good enough reason on its own. He believes that lenders looking to become banks need to have something of value to add to the market and offer to customers in order to succeed. Jason acknowledges the increasing competition for savings and that the brunt of the challenge and increasing our primary investment is in the people we recruit,” explains Graeme Hartop, CEO at Hampden & Co. Clients get a dedicated private banker who looks after their needs and those of their family and business interests. The bank hasn’t standardised its savings rates, instead leaving room for them to be negotiated with customers on the basis of each term and the size of their deposits. Hodge Bank claims that it has had “great success” offering niche products targeted towards older clients. David explains that it has found them to be more loyal and less swayed by shiny, new or tech-based offerings from new entrants. He adds that most of its products aren’t going head to head with banks. “We look at areas where we can add value through our product offering.” According to Jason, Recognise is set to serve a gap in the market: SME savers. He says that there is a lack of personalised service in this space. Compared with the retail market, he claims there hasn’t been much in the way of innovation and that is what Recognise is looking to achieve. Savings rates in the SME market are much less competitive compared with the retail space, which could be an area for bridging-lenders-come-banks to target. In fact, 62% of British SMEs are not earning any interest on their business savings at all, according to a study by Aldermore. IS NON-BANK FUNDING GETTING CHEAPER? One example of a bank’s blended cost of funds we looked at was as low as 1.62%. “It has got to move an awful long way before you see the wholesale market being a more competitive source of funding than retail and SME deposits,” Jason states. Despite this, Alex Maddox, capital markets director at Kensington Mortgages, View  “When you have a bank, you have scalable infrastructure, you have got a resilient business model. Those four letters carry a lot of trust”  26  Bridging & Commercial 

   26   27   28   29   30