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Tesco plc hackers threaten the challenger banks

Photo: C41n. Cropped. Licence: https://creativecommons.org/licenses/by-sa/3.0/

News that more than 20,000 Tesco (LSE: TSCO) customers had money stolen from their accounts over the weekend is naturally bad for Britain’s biggest supermarket, but it also inflicts plenty of damage on many of its fellow challenger banks.

Challenging times

Tesco is a big fish in groceries but small fry in the UK banking sector, with just 136,000 current accounts in total, a fraction of the estimated 68m active UK current accounts. Tesco is one of the new breed of challenger banks facing up to the big four of Barclays, Lloyds Banking Group, HSBC and RBS/NatWest. Names you may have heard of include Aldermore Bank, Atom Bank, Metro Bank, OneSavingsBank, Shawbrook and Virgin Money and there are plenty more starting up all the time. Personally, I’ve lost track.

Some investors have been snapping up shares in these banks, seeing them as a more exciting growth alternative to the stricken big boys. So far, performance has been mixed. Virgin Money (LSE: VM), which listed almost exactly one year ago, is down 16% in that time yet it isn’t particularly cheap, trading at 14 times earnings and yielding about 1.4%. However, it does now boast 3% of the UK mortgage market, and is growing fast in the credit card market as well. 

Mixed bag of banks

OneSavings Bank (LSE: OSB) floated at the same time and is down 26% since then, although it’s slowly heading in the right direction, with underlying loan growth of 13% for the nine months to September 2016. It currently trades at 8.17 times earnings and yields 3%. Metro Bank (LSE: MTRO), which floated in February, was forced to cut the price of its initial offering by 17%, from £24 to £20 a share, but at least this worked in favour of investors. It has rebounded strongly from its post-Brexit dip and today trades at around £27.47, a rise of around 37%. It recently posted its first ever quarterly profit of £600,000, against a £3.4m loss in Q3 last year, with revenue surging 78% to £53.4m.

The challenger banks face an uphill struggle establishing themselves as credible alternatives to the high street giants. The first problem is customer inertia. The current account switch service now allows people to move all their banking services within seven working days, yet take-up has been relatively disappointing since launch in September 2013. Although 567,677 bank switches took place in the first half of this year, that’s less than 1% of total UK current accounts.

Switched off

For the record, Halifax and Nationwide have been the biggest beneficiaries, with Barclays the biggest loser. So even when people do switch, there is no guarantee they will move to a challenger. Attempts by the Competition & Markets Authority to open up the sextort to further competition have been underwhelming.

The other big problem the challenger banks face is credibility. Many people simply don’t trust their savings to these little-known entities, even though they have the same £75,000 protection from the Financial Services Compensation Scheme. Unfortunately, the Tesco hack could make them even more wary. Although Tesco has pledged to reimburse customers for any losses, con Sumer she know they’re vulnerable. Rightly or wrongly, they may feel safer with the big boys. For me and many like me, challenger banks are a challenge too far.

Personally, I think there are more exciting growth prospects outside of the banking sector.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Barclays and HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.