What's going on?
You might fly with Virgin Airlines and workout at a Virgin Gym – but do you have a credit card from Virgin Money? Perhaps not yet, but more and more people are taking out credit cards and mortgages from them – and their profit is surging as a result. Virgin Money’s stock was up 7% on Wednesday after it reported results.
What does this mean?
Virgin Money now has more than a 10% share of the UK’s mortgage market and its credit card business grew significantly. The four large high street banks – Barclays, HSBC, Lloyds and RBS – control 70% of personal current accounts in the UK. But that could be changing as “challenger banks”, like Virgin Money and Metro Bank, gain traction (Metro already has current accounts, Virgin Money is likely to start offering digital current accounts soon).
Why should I care?
The bigger picture: Challenger banks are becoming a real threat to traditional banks – not just in the UK. Number26 is a German bank that is 100% digital. Virgin’s accounts are likely to be the same. The UK government is expected to outline ways to make retail banking even more competitive in the coming weeks. Given retail banking is very profitable for the big legacy players, like Barclays, the emergence of new “challenger” banks is certainly a threat.
For markets: Challenger banks don’t have the legacy problems of existing banks. It doesn’t have a bunch of old businesses which aren’t worth what they used to be, nor are they likely to get fined huge amounts of money for past misdeeds.They are new and nimble and, typically, have focused their attention on simple, yet profitable businesses (like mortgages). That means they’re making a much higher return (not in total, but as a percentage of what has been invested in the business, a.k.a. their “return-on-equity”).