Ex-Mittal Adviser Opens U.K. Bank With Wadhwani, Turner Help
by Richard Partington
August 19, 2015 — 2:00 AM EEST
Updated on August 19, 2015 — 5:33 PM EEST
Lakshmi Mittal, started a bank from scratch in the U.K. Its prospects have lured a former Bank of England rate-setter and a past top market watchdog to help out.
Khosla, 39, started OakNorth Bank Ltd. in 2013 to take on the nation’s largest lenders, who he believes under-serve small businesses. He won investment from former BOE monetary policy committee member turned investor Sushil Wadhwani, and added Adair Turner, the last chairman of the Financial Services Authority before it was scrapped, to his board this year.
OakNorth is the latest small lender seeking to erode the dominance of Britain’s four largest banks, which together control as much as 80 percent of the market. Wadhwani, whose career bridges hedge funds, central banking and academia, joins a group of wealthy financiers including Richard Branson and Steven A. Cohen who are backing some of the so-called challenger banks.
“Demand is even more significant than we thought,” Khosla said in an interview at OakNorth’s London offices in Cavendish Square. “Challenge to the big banks is the model, as well as addressing that unmet need. The market is far larger than what we would need to create a very successful business.”
Khosla is tapping a network of senior financiers to help build a lender that offers loans to businesses that major banks might ignore.
OakNorth secured a banking license from the BOE’s Prudential Regulation Authority in March, and aims to start taking deposits in the coming months. The bank made a 254,906-pound ($398,596) loss for the period from July 3, 2013 to the end of December 2014, according to its first set of accounts filed at the U.K.’s Companies House.
Wadhwani Stake
Wadhwani is an investor in the bank’s holding company, which is based in Jersey, Channel Islands, and the majority owner of that holding company is a Mauritius-based trust, company filings show.
As a member of the monetary policy committee of the Bank of England from 1999 to 2002, Wadhwani was known for arguing that the risks of inflation were overstated and interest rates could go lower. He said this month that he expects the BOE to raise rates this year, and that the U.K. should be weaned off “extreme monetary medicine.”
Wadhwani, 55, who runs London-based Wadhwani Asset Management LLP and is a partner at Caxton Associates LP, declined to comment about his stake in OakNorth.
Branson’s Virgin Money Holdings (UK) Plc leads a group of small British lenders taking on Lloyds Banking Group Plc, Royal Bank of Scotland Plc, HSBC Holdings Plc and Barclays Plc. Another challenger, Metro Bank Plc, has won investment from Cohen and other wealthy American backers including Ken Moelis, Richard LeFrak and Robert and Bruce Toll.
Mittal Connection
India’s billionaire Mittal steel family hasn’t invested in OakNorth, Khosla said, while declining to identify other investors. He also declined to comment when asked about Wadhwani.
A graduate of the London School of Economics who worked at ABN Amro Bank NV before moving to General Electric Co.’s private equity unit, Khosla, a Briton, was introduced to Lakshmi Mittal’s son Aditya through a university friend. The connection helped him to quit GE Capital with an offer to run the Mittal family-office private-equity investments. But he harbored a desire to run his own firm.
“Investing was great, but it felt like retirement,” Khosla says of his time working for the Mittals. “You’re one step away from the action.”
Copal, Moody’s
Before OakNorth, Khosla started Copal Partners with college friend Joel Perlman in 2002, a research provider that outsourced work to India. They later sold it to Moody’s Corp. in 2014 for an undisclosed sum.
The sale sparked controversy in India, where tax authorities argued the transaction involved avoidance measures because Copal was owned by a Mauritius-based firm. The islands off the southeast coast of Africa are often used by companies to route investment into India, because capital gains these firms make on Indian shares aren’t taxed in the Asian nation.
Delhi’s High Court ruled against the tax authorities in a case involving Copal, upholding the double taxation treaty between the two nations.
Khosla resigned from Moody’s as CEO and chairman of Copal within the past 12 months to concentrate on OakNorth. While the funds from the sale of his firm helped finance his British challenger bank, other backers of Copal including Deutsche Bank AG, Citigroup Inc. and Bank of America Corp. also made money.
Challenger Bank
“It was a phenomenal success story,” he said. “They all did really well out of that.”
After he turned his attention to OakNorth full-time, Khosla and Perlman, who is also a founder of the bank, decided he should become the lender’s third CEO in little more than a year.
“We’re used to being at the coal face,” he says of the change. “When I relinquished my duties at Copal it made sense for me to either be full-time executive chairman or take a CEO position. I like detail, and not everyone does. The regulator always preferred a non-executive chairman.”
Khosla replaced Chris Dailey, a former executive at Aldermore Group Plc, another challenger bank. Dailey had been in the role for six months since the departure of Richard Davies, a former head of U.K. operations at Barclays, who was the lender’s first CEO since its inception in late 2013.
‘Part Fintech’
After stepping into the executive role, Khosla brought in former Invesco Ltd. chief financial officer Ratan Engineer as chairman. Engineer was replaced after his death in April by Cyrus Ardalan, a former vice chairman of public policy and government at Barclays.
Although a banking license will enable OakNorth to take customer deposits to help fund lending, Khosla says he wants his firm to have the characteristics of a technology company and a private-equity firm, as well as the hallmarks of a traditional lender.
“Fundamentally, I don’t want a traditional bank culture,” he says. “I want to be part fintech, part fund, part bank. We’re not going to do what every other challenger bank is doing, which is piling into all of the same products.”
OakNorth plans to offer small companies loans that aren’t backed by assets such as real estate for amounts of less than 5 million pounds. Banks “typically don’t focus here,” according to Khosla, while financial technology firms and direct-lending funds lack the customer deposits that a banking license can bring to support that market segment.
IPO Plan
“For banks to understand all the financials, the cost is too high,” he says. “The whole approval process would be more than the fees. If you combine our technology and systems with the bank underwriting process, making that very efficient, you can make money out of it.”
Khosla said the bank plans to hold annual private fundraising rounds before selling shares in an initial public offering within five to seven years.
OakNorth wants investors who “believe in the gap in the market and the approach we’re taking,” he said of the private placements. “We want to build a robustly good business, and then if you want to tap larger funding requirements by going public, then that makes sense.”
Banks face credit card payouts in fresh mis-selling scandal
Judith Evans
Two million UK credit card users can claim compensation from this month after being sold unnecessary fraud protection.
The insurance provided cover for fraudulent use of lost or stolen cards even though banks and card issuers are largely responsible for such payments.
Eleven banks and credit card providers, including HSBC, Lloyds, Barclays, Royal Bank of Scotland and Santander, marketed the products from Affinion International Limited.
The looming payouts are the latest in a series made by British banks, which have been hit by a wave of mis-selling scandals since the financial crisis.
In the latest case, the Financial Conduct Authority fast-tracked the redress scheme without holding an investigation after Affinion, the banks and credit card companies took part in voluntary talks. They have not admitted any liability.
It echoes another scheme established two years ago to cover customers of Card Protection Plan Limited and 13 high street banks and credit card issuers, who were mis-sold protection that was unnecessary or covered risks that had been exaggerated.
The payouts follow the £27bn set aside by lenders to provide compensation over payment protection insurance , which covered loan payments for customers unable to work, but was widely mis-sold and sometimes contained small-print exclusions that meant it could rarely be used.
Santander was, meanwhile, fined £12.4m by the FCA last year over “widespread” failings in its investment advice.
The latest compensation scheme covers a range of products sold since January 2005 that cost about £25 per year and included an insurance feature covering fraudulent use if a card was lost or stolen.
However, customers are only held liable for unauthorised transactions up to £50 in limited circumstances, and only before they report the card lost or stolen.
The compensation involved is smaller than that paid out for PPI, with customers only able to claim about £270.
Customers must apply for payouts by March 18, 2016 from AI Scheme Limited, a company set up to handle the compensation.
Products covered include Card Protection, Sentinel, Sentinel Gold, Sentinel Protection, Sentinel Excel, and Safe and Secure Plus. They were also sold by AIB Group, trading as First Trust Bank and Allied Irish Bank; Capital One; Clydesdale; Northern Bank, trading as Danske Bank; Tesco Personal Finance and the Co-Operative Bank.
http://www.thisismoney.co.uk/money/markets/article-3202516/CITY-FOCUS-Banks-purgatory-past-sins-pain-continues-High-Street-lenders.html
A Bank for People Who Hate Banks
Mondo CEO Tom Blomfield doesn't look like a typical banker, and he doesn't want his mobile app to behave like a typical bank.
by Stephanie Baker
August 19, 2015 — 12:00 AM EEST
On a sweltering afternoon in July, Tom Blomfield emerges from Bank of England offices in the heart of the City of London and promptly sheds his suit jacket. Blomfield, the 29-year-old, bearded CEO of Mondo, a startup smartphone bank that’s applying to operate in the U.K., isn’t the suit-wearing type. He’s eager to get back to his Clerkenwell workspace for a beer to celebrate Mondo’s surmounting a big hurdle in its quest for a banking license.
Blomfield and his team have just spent two hours getting grilled by eight regulators from the Bank of England and the Financial Conduct Authority, Bloomberg Markets magazine reports in its October issue. The officials quizzed them on how Mondo will attract customers and remain financially viable. After poring over Mondo’s 250-page submission, which included details of its capital and liquidity plans, the group pressed Blomfield on why he wanted to run a bank. “They said he didn’t look like a typical banker,” recalls Mondo Chairman Denise Kingsmill, who, as a member of the House of Lords and a former deputy chairman of the U.K.’s Competition Commission, added a touch of gravitas to the presentation.
Blomfield had a ready retort: “I said I want to run a new type of bank.”
When he’s not trying to charm regulators, Blomfield shows the kind of passion—and irritation—it takes to build a bank from scratch. His catalog of complaints about big lenders is familiar to most consumers: hours of paperwork to open an account or apply for a loan, exorbitant fees for using your credit card abroad, onerous overdraft charges, and clunky mobile apps. “I wake up and say: ‘My bank is so bad. These guys are dinosaurs!’” Blomfield says. “It impacts me, my family, all my friends. We all have to use banking, and it’s broken.”
Blomfield wants to make Mondo the Google or Facebook of banking with accounts that are as easy to use as e-mail. “We are targeting a demographic that values being able to do everything over a mobile phone in five seconds,” he says.
If Blomfield and Kingsmill get their way, Mondo won’t be just another snazzy app using the license of an existing bank. That’s been done in the U.S. by Simple.com, which piggybacks onto Bancorp Bank, and in Germany by Number26, which is bolted to Wirecard Bank. Unlike most other startups, Mondo has built proprietary software. If Mondo gets a license from the BOE’s Prudential Regulation Authority, it could—as early as next year—begin taking deposits and lending money.
Should Mondo pass muster, it might thank Chancellor of the Exchequer George Osborne. He’s overseen the regulatory revamp that’s made it easier for startup banks to get off the ground. In a speech last year at Canary Wharf tech accelerator Level39, Osborne said he wanted to make London the “fintech capital of the world.” In March, he said the Bank of England should grant at least 15 new licenses in the next five years.
“Osborne is a real tech geek,” says Rohan Silva, a former technology adviser at 10 Downing Street, pointing out that the chancellor learned to code as a teenager. “Investors and entrepreneurs haven’t started new banks in this country because they knew the regulators wouldn’t let them,” he says. “We thought if we took away regulatory barriers, fintech would explode.”
When it comes to British banking, such innovation looks long overdue. The big four banks—Barclays, HSBC Holdings, Royal Bank of Scotland Group, and Lloyds Banking Group—control 77 percent of the U.K.’s 65 million personal checking accounts. Customers aren’t overwhelmingly happy with the available choices. Only 60 percent say they’re satisfied with their bank, a 2014 survey from consulting firm Accenture found.
It used to be exceedingly difficult to start a bank in the U.K. The process took years and required millions of pounds in upfront capital, without any indication whether regulators would give their seal of approval. When a bricks-and-mortar lender called Metro Bank opened its doors in 2010, it was the first new retail bank U.K. regulators had authorized in 100 years—and it took them almost two years to OK it. Today, Metro has more than 500,000 customers, and deposits surged 188 percent to £2.9 billion ($4.5 billion) last year. While Metro’s branches are open seven days a week and feature amenities such as water bowls for dogs, the bank began offering a mobile app only last year.
The application process is now simpler—for both physical banks like Metro and digital ones like Mondo. Under BOE and FCA rules, a new entrant can hold as little as £1 million in capital initially. An applicant needs common equity Tier 1 capital of 4.5 percent of risk-weighted assets, significantly less than the 9.5 percent required under the old rules that still apply to existing banks. The Bank of England says it will use its discretion to give startups more time than before to build the additional capital required under Basel III.
“Regulators here are much more progressive and open than in the U.S.,” says Eileen Burbidge, an American who’s a partner at Passion Capital, the London venture firm that in April gave Mondo $2 million in seed money. “If you’re doing leading-edge fintech, London is the place to be.”
Indeed, investment in fintech companies is growing faster in the U.K. than it is anywhere else in the world. Last year, London’s fintech startups attracted £343 million, triple the amount invested in the previous year, according to London & Partners, a firm set up by London Mayor Boris Johnson to promote the city. U.K. fintech companies raised £306 million in the first half of 2015 alone. With venture capital red-hot for fintech, Mondo’s goal to attract a further $15 million to begin operating as a bank looks modest. The sum would cover additional hiring and marketing as well as initial capital to back any lending losses.
More banks are getting the green light—and getting it faster. Thirteen have won licenses since the regulatory changes in 2013. In June, Atom Bank became the U.K.’s first digital-only lender to secure approval, just six months after it formally applied. It expects to begin opening accounts next year, focusing on its mobile app to target small and medium-sized businesses and consumers.
Atom likely will beat Mondo to the market. It has attracted £25 million in financing from such big names as Jim O’Neill, the former Goldman Sachs economist who’s now the U.K. Treasury’s commercial secretary, and venture capitalist Jon Moulton. “It’s in everyone’s interest to digitize as much of the customer experience as you can because it costs less,” says Mark Mullen, Atom’s CEO, who ran First Direct, the telephone bank set up by HSBC in 1989. Atom hasn’t revealed details of its mobile app. Mullen says only that he hopes to use biometric security and locational data to enrich the offering.
In contrast, Mondo is an open book. It’s in the process of rolling out a prototype app and prepaid MasterCard to 500 people initially to get feedback on which parts are popular and which aren’t. “We don’t want to be building a bank behind closed doors,” Blomfield says. “The real value is not in the ideas but in the execution.”
Blomfield’s time at Silicon Valley incubator Y Combinator in 2011 shapes his approach, so much so that he sometimes dons a T-shirt with the Y Combinator motto: “Make Something People Want.” Blomfield earned a law degree at the University of Oxford. A few years later, he teamed up with two fellow Oxford grads to build GoCardless, a simplified system for companies to accept recurring payments. Today, it’s used by the Guardian to collect subscriptions and the U.K. government for road taxes. Blomfield still has a stake in GoCardless, which processes $1 billion of transactions a year.
Once GoCardless was up and running, Blomfield set his sights on banking for consumers. He joined with experienced bankers to get Mondo off the ground. The chief risk officer is Paul Rippon, the former head of operations at Allied Irish Bank; the chief financial officer is Gary Dolman, the former CFO of Japan’s Mizuho International.
Gen Y is embracing phone-based banking in greater percentages than other generations.
square before the information Gen Y is embracing phone-based banking in greater percentages than other generations. PwC
While technology has changed every aspect of our lives, Blomfield says consumer banking has remained frozen in time. Banks continue to offer customers a static list of deposits and withdrawals rather than providing timely updates or useful tools to analyze spending or saving. In a world of instant messaging, many lenders don’t communicate in real time. Blomfield’s current bank (which he declines to name) took two weeks to alert him he’d overdrawn his account by £800 and then charged him £20. “The banks have their hands in your pockets constantly, taking money out,” he says.
The Mondo app is designed to tell you if you mess up. It lets you set up real-time notifications that say how much you’ve spent daily or whether you’re going into overdraft. If you need £500 to tide you over to payday, Mondo will tell you how much it will cost for a short-term loan instead of charging you after the fact.
Pulling out his phone, Jason Bates, Mondo’s 43-year-old co-founder and chief customer officer, shows his Mondo prototype app. He’d just had a burger with his wife at Five Guys in Soho, which turned up immediately on his account with a map of where he’d used his Mondo card. With a swipe, he demonstrates how you can turn off the card if you lose your wallet and immediately turn it back on if you find it. You can even block your card at pubs to encourage a dry spell.
By tracking your regular bills, Mondo can alert you if something is out of the ordinary, like a utility charge that’s higher than normal. This smarter use of data can help detect fraud, Bates says. “We see your phone is in Manchester but your card was being used in London,” he says. “We can block your card and send you a text saying: ‘Something is fishy. Can you confirm?’”
Blomfield and Bates say Mondo could charge much lower fees and still become profitable because its cost base is a fraction of what major banks shoulder. Old-style lenders are saddled with the expenses of maintaining branches and updating antiquated IT systems. Back-end computer systems that process transactions can date to the 1970s and have had meltdowns, says David Parker, a financial services consultant at Accenture in London and former director of operations at Barclays Capital. Last year, British regulators fined RBS £56 million for a computer failure in 2012 that left 6.5 million customers without access to their accounts for weeks after a contractor updated software. The problems “revealed unacceptable weaknesses in our systems,” Philip Hampton, RBS’s chairman, said.
“It’s difficult to build an app that’s fantastic when you have an ugly core banking system,” Parker says. “The banks have to change quickly or they run the risk their customers will desert them.”
Not everyone is convinced tech-savvy banks will lure enough customers from the big four to become major players. New fintech banks may have a hard time attracting more than just “hardcore money geeks,” says James Moed, a consultant to fintech startups and a former director of IDEO, a London-based financial services designer. “Most people find managing their money boring and regard banking as a utility,” Moed says. “I’m not sure great apps will motivate people enough to switch.”
Generation Y, the so-called millennials, born from the 1980s to the early 2000s, may be the most fertile hunting ground. Almost 67 percent prefer mobile apps for banking, compared with 46 percent of baby boomers, aged 51 to 69, according to PricewaterhouseCoopers. A study by Viacom’s Scratch research unit called “Sorry Banks, Millennials Hate You” found 71 percent of 18- to 34-year-olds would rather go to the dentist than listen to what their bank says.
Blomfield acknowledges that Mondo isn’t for everyone. “My grandmother would not use this bank,” he says. “But a big segment of the population would.”
He likens the banking behemoths to Blockbuster Video, while digital startups such as Mondo are like Netflix. With the right technology and open-minded regulation, Blomfield says, even as staid and entrenched an industry as retail banking can be disrupted. “We think,” says the guy who doesn’t look like a typical banker, “there will be a generational shift in how banking works.”
This story appears in the October issue of Bloomberg Markets magazine.
European Banks to Sell a Record $154 Billion of Loans, PwC Says
by Stephen Morris
August 18, 2015 — 1:28 PM EEST
European banks are set to divest a record 139 billion euros ($154 billion) of loans this year, led by the U.K., as the industry accelerates asset sales to meet new rules, according to PricewaterhouseCoopers LLP.
Banks have offloaded 54.5 billion euros of debt and a further 84 billion euros of loans are in the process of being sold, PwC said in a report Tuesday. The U.K. and Ireland account for more than 60 percent of deals in progress this year, after disposing of 125 billion euros in the five years through 2014.
“It is no surprise the U.K. and Ireland, followed by Spain, have been the most active portfolio transaction markets in Europe given that banks locally have been very active in cleaning up their balance sheets,” said Richard Thompson, chairman of PwC’s European portfolio advisory group. “Italy has seen a large increase in activity in 2015 and is one of the main focus areas for international investors and funds.”
Banks have been shrinking their balance sheets since the financial crisis to comply with a raft of regulations that require them to maintain capital buffers as a proportion of assets, to absorb losses and protect taxpayers from bailouts. Hedge funds and private-equity firms are among buyers of the loans as they seek to gain exposure to the recovering British and European economies, which has boosted competition and prices this year, PwC said.
Commercial real estate debt and secured mortgages accounted for 83 percent, or 45 billion euros, of loans sold by banks so far this year, the data show.
Bolster Capital
Last month, Commerzbank AG and Royal Bank of Scotland Group Plc sold about $1.4 billion of unwanted assets, including ships and real-estate loans, to bolster capital. In April, RBS also divested $5.6 billion of North American corporate loans to Japan’s Mizuho Financial Group Inc. Goldman Sachs Group Inc., CarVal Investors LLC and Bank of Ireland Plc bought loans with a face value of 2.6 billion pounds from Lloyds Banking Group Plc in July.
U.K. banks are expected to sell another 42.5 billion euros this year, raising the total for 2015 to 56 billion euros, PwC estimated. Ireland may account for 18.5 billion euros of sales. Spanish lenders, with about 15 deals in progress, will dispose of about 20 billion euros in total, with German and Italian banks expected to sell 22 billion euros and 16 billion euros respectively.
RBS Said Close to Selling Russian Banking Assets to Local Buyer
by Richard Partington and Ambereen Choudhury
August 18, 2015 — 3:56 PM EEST
Royal Bank of Scotland Group Plc is close to disposing of its Russian banking assets to a local lender, according to two people with knowledge of the matter.
RBS will probably agree terms of the sale with the undisclosed bank within the coming weeks, said the people, who asked not to be identified because the details are private. The Edinburgh-based lender had 1.6 billion pounds ($2.5 billion) of Russian assets at the end of June, company filings show.
Companies including Franklin Templeton Investments and BNP Paribas SA are pulling Russian investments as prolonged sanctions deepen the country’s first recession since 2009. RBS acquired the business as part of its purchase of ABN Amro in 2007, just before the financial crisis forced it into a bailout.
“We are exploring sale or wind-down options for our operations in Russia,” a RBS spokesman said in an e-mailed statement on Tuesday. The changes are part of efforts to become a “simpler, stronger and more sustainable bank, more aligned to the needs of our customers in the U.K. and western Europe.”
RBS, which is 73 percent owned by the British government, said earlier this year it plans to cut the operations of its investment bank from 38 countries to 13.
Greek Bank Resolutions to Set European Precedent, Barclays Says
by John Glover
August 14, 2015 — 11:29 AM EEST
Greece will probably be the proving ground for the European Union’s new rules on resolving failing banks, according to analysts at Barclays Plc.
Greece’s euro-area creditors in July made transposition of the EU’s Bank Recovery and Resolution Directive into national law a precondition for fresh bailout talks. The BRRD gives regulators wide-ranging powers to recapitalize stricken lenders with the aim of maintaining the financial services an economy needs and without recourse to public funds.
“This would be the first chance for creditors to see the new European bank legislation ‘in action’ and it may make for uncomfortable viewing,” analysts led by Christy Hajiloizou wrote in a note published late Thursday. “Specifically, we expect non-preferred creditors to suffer losses as far up the liability stack as senior unsecured bondholders in a resolution.”
The European Central Bank’s supervisory arm will probably attempt to ensure private stakeholders and creditors make as large a contribution as possible to the recapitalization of the lenders, the analysts wrote. The ECB wants to create a precedent for future bank resolutions, meaning the process will “likely have broader implications for European bank credit.”
Senior bonds of the four largest Greek banks are quoted at between 53 cents on the euro for Eurobank Ergasias SA’s 295 million euros ($328 million) of 4.25 percent notes due in June 2018, and about 68 cents for Alpha Bank AE’s 3.375 percent debt maturing in June 2017, data compiled by Bloomberg show. The prices are too high, according to Barclays.
‘Close to Zero’
“We estimate recovery would be close to zero in a bankruptcy given their heavily encumbered balance sheets,” the analysts wrote.
The BRRD’s most widely watched attribute is the ability it gives regulators to convert senior bonds to equity or write down their value. In Greece that tool doesn’t become available until Jan. 1. Barclays expects the resolution of the Greek banks to be addressed before then using different methods.
“This does not preclude the use of other resolution tools, such as transfer of senior bonds to a ‘bad bank,’” the analysts wrote. “We would still expect final recovery to be significantly below current cash prices.”
For bondholders, the best solution would be no resolution, with private capital raisings, or recapitalization under state-aid rules, according to Barclays. While that can’t be ruled out, “it would be would be counter to the political, economic and regulatory incentives of the ECB and euro area.”
