TANDEM Bank has become the latest digital lender to target a stock market flotation, shortly after Zopa revealed it wants to list in two to three years.
But with Funding Circle’s initial public offering (IPO) in September proving a bumpy ride, is there really investor appetite for listed digital banks and peer-to-peer lenders?
Tandem Bank sits alongside Monzo, Revolut and Starling Bank as one of a new breed of challengers trying to disrupt the banking sector using fintech innovation. Tandem’s marketing director Matt Ford said an IPO in the next three to five years would “make sense” for the firm in the face of its rapid growth. The bank launched six products last year and saw its customer base swell to 500,000, far ahead of its expectations.
Ford suggested the investor appetite could see the company become a ‘unicorn’, meaning a start-up valued at over $1bn. He told the Press Association that there is “clearly potential for multiple unicorn valuations in the digital banking space, as evidenced by recent capital raises”.
Monzo, Revolut and Funding Circle have all achieved unicorn status, but the latter has had a tough time since it listed. Coming to market with an offer price of 440p, three months later the shares had dropped more than 40 per cent after a note from analysts at Citigroup downgraded them to a ‘sell’. The note pointed to “evidence of credit deterioration”, highlighting a recent update from Funding Circle’s dedicated investment trust. Today the shares are trading at 312p.
The UK’s oldest P2P lender Zopa could be next in line to list, having recently gained its banking licence and raised £60m privately. Its chief executive Jaidev Janardana said an IPO would be a natural next step, given it will be entering the much more capital-intensive banking business.
Read more: Zopa gains banking licence
But what sort of reception would it get? John Cronin, financials analyst for investment banking at broker Goodbody, said IPO plans bode well for these lenders over the longer-term, but he would not expect there to be much appetite for them in the current environment of stock market volatility.
“Markets are not receptive today,” he said, noting surveys that show fund managers are reducing equity exposure, while investors are largely risk-off. “The more buoyant market conditions last September were more supportive for Funding Circle to raise money,” he said.
However, a proven business model could be more important than market conditions in persuading investors to back any future IPOs.
“Monzo, Tandem and Starling Bank are the most likely IPO candidates and they will need to make more progress to show this is a model that will generate profitability,” he said. He noted some of these fintech challengers have made great strides in terms of product launches, opening new accounts and trying to revolutionise the banking space.
Monzo in particular has gained a lot of customers in the youth market. However, none of these lenders have yet proven their profitability. If they are able to do this, they should have the opportunity to access capital markets in a few years’ time, he suggested.
“It wouldn’t be unreasonable to have those longer-term plans,” he said.
“The reality is that, while Tandem, Monzo and Starling Bank appear to be emerging as leaders of the pack of new branchless banks in terms of new customer win, the landscape is evolving rapidly and we would not rule out other newcomers from achieving strong penetration rates in due course – though a novel proposition or competition-busting rates will be necessary as the aforementioned names are quickly growing strong brands. Indeed, current trends position Tandem and the others well for future flotation plans.”