Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Senior figures in the African National Congress were on Friday debating the future of President Cyril Ramaphosa and discussing options for a coalition partner, as the depth of the loss suffered in South Africa’s general election sank in.

With more than half the votes counted following Wednesday’s poll, the ANC was below 42 per cent, several percentage points lower than it and most analysts had predicted and a tally that would deprive it of its governing majority.

The poor showing has complicated the task of finding a partner that would allow it to extend an unbroken rule of South Africa stretching back to 1994 following the end of apartheid.

It has also cast doubt over the future of Ramaphosa, who took over six years ago with a promise to reinvigorate the ANC but who instead presided over its worst-ever election performance.

Mavuso Msimang, a respected figure in the party, said there would now be questions about whether Ramaphosa could continue as leader. “If the vote remains close to 40 per cent then people will suggest he leaves. There’s a lot of talk about that,” he said.

Msimang said that, if Ramaphosa stayed, a coalition with the market-oriented Democratic Alliance was possible. The latest vote tally puts he DA in second place with 23.5 per cent.

But if Ramaphosa were pushed out, Msimang added, it would open the way for a deal with Jacob Zuma’s Umkhonto we Sizwe party. The MK party was on just over 11 per cent despite being formed by Ramaphosa’s predecessor only six months ago.

“What business wants is a certainty which can only come with an ANC-DA alliance,” Msimang said, adding that some within the ANC would be viscerally opposed to a deal with the DA, which they see as both white and reactionary. 

With 56.3 per cent of the vote counted as of Friday morning, the ANC was on 41.9 per cent, well short of the tally in the mid-40s that had been expected and the 57.5 per cent it received in 2019. “The state of shock within the leadership of the ANC is amazing,” Msimang said, “but we had it coming.”

Given the scale of the ANC’s losses it would be difficult for it to form a working coalition without making an alliance either with the DA or the MK party, political analysts said. Most of the other smaller parties did not get more than 1 or 2 per cent of the vote.

Paul Mashatile, Ramaphosa’s deputy and a possible successor, is thought to be more likely to favour a deal with MK and possibly the radical Economic Freedom Fighters. The Marxist-leaning party led by the firebrand Julius Malema was in fourth place on 9.5 per cent.

Gwede Mantashe, chair of the ANC, told the FT that there had been no call within the ANC for Ramaphosa’s removal.

“I would resist this with everything I have. You don’t discus the removal of a president in the middle of an election,” he said. Rather, he said, the talk of Ramaphosa resigning was something that was “being discussed by our opponents”.

Asked if the ANC would consider this after the election, he said: “This is not going to be discussed.” Mantashe said it would be wrong to consider this a “bad result” when the ANC had still obtained over 3mn votes, and there were new parties emerging in South Africa’s political landscape.

Lawson Naidoo, executive secretary of the Council for the Advancement of the South African Constitution, said Ramaphosa needed to “move quickly” towards a deal with the DA or he risked being pushed out by his own party first. 

“If they get rid of him they’re going to do a deal with MK,” he said. “Once the ANC starts mobilising against Cyril he could be out very quickly.”

William Gumede, chair of the Johannesburg-based Democracy Works Foundation, said: “Ramaphosa’s head is on the block here. They’re going to look for a scapegoat and it’s most likely to be him. He will have to use all his negotiating skills to stay in power.”

Ralph Mathekga, an independent political analyst, said the ANC’s likely result would put any incumbent leader under pressure. “Ramaphosa can expect more pressure than most, given how vulnerable he has been. I can’t see him riding this one out,” he said.

May 31 (UPI) — Three people, including a police officer, were killed and four others were wounded Thursday evening in a shooting in Minneapolis, according to authorities who said the suspect was also among the dead.

Minneapolis Mayor Jacob Frey identified the slain Minneapolis police officer in a press conference as 28-year-old Jamal Mitchell.

Frey vowed that his life, service and name will forever be remember by the city of Minneapolis.

“He was a hero, a son, a father, a fiance and an officer who was so deeply committed to protecting and serving. He would run toward danger when the rest of us would run in the other direction,” he said.

“Our whole city right now is grieving.”

The city said in a statment that the shooting began at about 5:15 p.m. when the Minneapolis Police Department received a call of two people shot inside an apartment on the 2200 block of Blaisdell Avenue South.

Upon arrival, the officers came under fire but were able to return fire with the gunman.

Two officers, one of who was Mitchell, were injured in the gunfight, as was the suspect who died at the scene.

The two wounded officers were transported to the Hennepin County Medical Center, where Mitchell was pronounced dead. The other officer suffered non-life-threatening injuries, authorities said.

At the residence where police were called, officers found two people who had been shot. One was pronounced dead the scene and the other was transported to the hospital with life-threatening injuries.

A man had also been shot while sitting in his car by the residence. He suffered life-threatening injuries and was transported to the hospital, while a firefighter on the scene suffered non-life-threatening injuries.

The motive behind the shooting, which is under investigation, was unclear.

“This has been a terrible day for our agency and in law enforcement and its happening all too frequently and it affects so many,” Blackwell said.

Mitchell is the latest law enforcement officer to die in the line of duty.

According to the Officer Down Memorial Page, 59 law enforcement officers have been killed in the line of duty this year, including 22 by gunfire.

In a 2018 letter to new staff members, digital bank Monzo outlined a lofty series of ambitions. The company said it aimed “to do for personal finance what Facebook has done for keeping up with your friends, or Google for finding information”.

The company, barely three years old at the time, also set a “long-term goal” of reaching a billion customers worldwide. Alongside a new cohort of challengers that also included Starling and Revolut, it was on a mission to usurp “legacy” banks, particularly the Big Four of HSBC, Barclays, Lloyds and NatWest that dominate the UK market.

A decade after these fintechs burst on to the scene, they have arguably succeeded in their mission of setting new standards for digital banking; features such as foreign currency transactions and bill-splitting, along with reliable, smartphone-friendly technology, are loved by younger customers.

“They have been amazing at challenging some of the norms in the industry,” says Tom Merry, a partner at consultancy Accenture.

But they are now being tested in a downturn. The plentiful venture capital that financed their heady growth — globally, the sector attracted $102bn in investment in 2021 — is drying up. Yet they are still burning through cash to acquire new customers while higher interest rates are driving increased competition for consumer deposits.

Traditional high-street banks have raised their game by upgrading their own digital banking services, with the result that about 60 per cent of adults living in Britain now use a mobile banking app, up from 33 per cent in 2015, according to trade body UK Finance

Critics say consumers are using neobanks as a convenient payment management service, rather than as a replacement for traditional current accounts.

Investors in fintechs are increasingly scrutinising the neobanks’ differing business models and assets, looking for proof they can be durably profitable and attract sufficient deposits to fund lending.

Their managers are working out alternative ways to generate revenue, including monetising data and licensing technology to others.

“Are neobanks an evolution or are they a revolution? They feel like an evolution,” says Tom Mendoza, fintech partner at EQT venture.

“Many of them are good companies but they will not fundamentally disrupt the fabric of retail banking.”

Launched within a year of each other between 2014 and 2015, the UK’s three leading digital challengers all benefited from ready access to venture capital funding.

The companies quickly reached “unicorn” status — defined as a private valuation of above $1bn — and valuations ballooned higher still during the mania for tech stocks. Revolut became the UK’s top fintech in 2021 after a funding round led by Japanese investment group SoftBank implied a $33bn valuation, though two of its investors last year reduced the carrying values of their stakes.

All have enjoyed a decade of rapid growth in customer numbers but pursued increasingly differentiated strategies.

Revolut is Europe’s largest neobank with 40mn customers worldwide. It has opted for rapid expansion across multiple markets and attracted users with a broad suite of services including multi-currency current accounts, cheap foreign exchange and cryptocurrency trading.

The fintech is based in London, where its offices are emblazoned with neon signs exhorting staff to “get shit done”, but licensed as a bank in Lithuania. Its application for a licence in the UK, its single biggest market, has been stalled for more than three years; the departure of several senior executives and a warning from auditors that it may have “materially misstated” its revenues on its 2021 accounts have not helped.

Starling and Monzo secured UK banking licences in 2016 and 2017, respectively. But the two banks, which split from the same company following a row between founders Anne Boden and Tom Blomfield, have also pursued divergent paths.

Monzo has focused on retail customers, while Starling has also expanded into banking for small businesses and built up a 9 per cent share of that market. 

Starling is also the only one of the three that is currently profitable, posting a £195mn pre-tax profit in the year to March 2023. Monzo and Revolut say they expect to do so in their next set of accounts.

Profitability has moved to the top of the agenda for the sector as higher interest rates and an investment slowdown in the last two years forced companies to drop their “growth at all costs” mindset.

Global fintech investment has dropped by nearly 50 per cent in 2023 compared with the previous year, according to trade body Innovate Finance.

Neobanks have undeniably achieved one of their mission statements: making digital banking easy. Their designed-for-mobile interfaces attracted a new generation of customers while clever graphics, clear copywriting and intuitive budgeting tools helped foster transparency around personal finance.

Features such as the ability to split bills, temporarily freeze bank cards, move money and get payment notifications in real time within an app have become staples of modern-day banking.

Unlike traditional banks, whose IT often comprised multiple layers of mostly server-based systems, further complicated by mergers and acquisitions, fintechs have relied on newer, cloud-based applications.

They were also run like start-ups. Managers encouraged staff to move quickly to build and test new products. Lucas Johnston, a former software engineer at Starling and Monzo who now works in the FT’s consulting arm, recalls the nascent industry embracing “the Silicon Valley mantra of constantly talking to customers and iterating on [their] products”.

“That, combined with a relatively young team typically from a tech background working with a modern tech stack, meant that they found the core features that consumers wanted,” he says. 

Within a few years of existence, the new banks had forced some of the nation’s largest and oldest financial institutions to pour millions of pounds into the development of their own apps in order to compete with their younger peers. The big banks not only borrowed some of the fintechs’ flagship features, they also poached staff from their ranks.

“The progress that has been made by the incumbent high street banks would not have happened absent the intervention that these neobanks have made,” says Merry.

But the ability to quickly open accounts and make transfers has also proved a boon for criminals. Britons lost £1.2bn to financial fraud last year, according to trade body UK Finance, with experts pointing to the country’s digitised banking industry as a factor.

The start-ups struggled to scale up their anti-financial crime capacities at the same speed they were attracting new users, while a wave of new sanctions imposed after Russia’s 2021 invasion of Ukraine increased the amount of due diligence banks had to conduct on new customers.

The Financial Conduct Authority in 2022 warned that a spike in “suspicious activity reports” to the National Crime Agency had raised “concerns about the adequacy of [neobanks’] checks when taking on new customers”. The year before, the watchdog launched an investigation into Monzo over potential breaches of financial crime regulations. 

“There cannot be a trade-off between quick and easy account opening and robust financial crime control,” FCA executive director Sarah Pritchard said at the time. 

A separate report from the UK’s Payment Systems Regulator said that Monzo and Starling had some of the highest fraud rates in 2022, with only 6 per cent of those who reported fraud to Monzo fully reimbursed by the bank — compared to 44 per cent for Starling, 70 per cent for NatWest and 91 per cent for Nationwide.

Revolut’s compliance has also raised concerns. A flaw in its payment system in the US allowed criminals to steal more than $20mn of company funds over several months in 2022, the FT has previously reported.

The FCA has also investigated Revolut over allegations it allowed money to be released from accounts flagged by the National Crime Agency as suspicious.

The push for profitability will require the challengers to tweak their business models away from simply acquiring more customers.

“The neobanks recognise they will not survive at scale and be sustainably profitable without a two-sided balance sheet [with loans and deposits] that’s deep, but they are not there yet,” said Accenture’s Merry.

Conventional banks have traditionally offered current accounts at little or no profit to attract customers and provide deposits that can then be recycled into mortgages and personal loans.

The differential between the interest paid on those deposits and that charged on loans — the so-called net interest margin — underpins their profits. Customers are also upsold other products, such as credit cards, insurance and investment services.

£1.2bnAmount Britons lost to financial fraud last year, according to trade body UK Finance

By contrast, and despite attempts to push into new areas including buy-to-let mortgages for Starling and passive investing for Monzo, fintechs still derive most of their revenue from transaction fees and interest on cash deposited with central banks.

“Outside of the current account, there hasn’t really been any other game-changing propositions [from neobanks],” says Julian Sawyer, who co-founded Starling but left the bank in 2019 and now works in crypto.

Many of their customers still rely on a traditional bank account to receive salary payments, then use the convenient functionality of a neobank to manage payments.

Jayne Opperman, chief executive of consumer relationships at Lloyds Banking Group, says that while many Lloyds customers hold multiple bank accounts, they still want “a trusted bank” and tend to rely on the legacy institutions for big life transactions such as buying a home.

Investors are closely watching the fintechs’ shares of “primary bank accounts” — typically those that receive salary payments. An FCA review in 2022 estimated that UK neobanks had a market share of about 8 per cent of personal current accounts.

But the same review found that relative to big banks, a smaller proportion of those were primary accounts. “This results in lower balances, lower volumes of transactions, and lower overdraft usage [leading] to lower funding benefits and less scope to generate fee income.”

Fintechs downplay the importance of primacy. Revolut’s head of growth, Antoine Le Nel, says that while “we may not have too many people bringing their salaries . . . we have a lot of people who move all their money to Revolut the day after”.

Its customers move about £2,000 to their Revolut account every month, Le Nel says. The company estimates that more than a third of its customers use Revolut as their primary bank account for day-to-day payments.

Monzo chief executive TS Anil told the FT in March that while it does not publish the percentage of salaries paid into its current accounts, “the quality of engagement” of its users was “off the charts” relative to the UK market.

Monzo and Starling rank ahead of other banks when it comes to how likely customers would be to recommend them to friends and families, according to an industry-wide survey conducted by Ipsos.

“Whether you look at weekly transactions, bank retention, customer love, net promoter score, it’s no accident that the largest share of our user growth comes from word of mouth and organic channels,” said Anil.

Even if digital banks can convince customers to trust them with a larger portion of their money, they will have to contend with wider structural changes in the UK banking market.

Analysts say that customers who would once have relied on a single institution for many of their financial needs — a frequent quip used to be that Britons were more likely to change their spouse than their bank — are increasingly using a potpourri of services from various providers.

One person may use Starling or Monzo to buy groceries while holding a mortgage with NatWest, sending cross-border payments via listed fintech Wise and trading crypto on Revolut.

60%Percentage of adults living in Britain that now use a mobile banking app, up from 33 per cent in 2015

Neobanks are also rushing to explore new sources of revenue beyond the traditional business of banking. Starling is betting that franchising its technological knowhow will boost its valuation, Monzo is expanding into the US, while Revolut is diversifying into areas such as advertising.

In addition to the reinvigoration of high-street banks, fintechs are also facing competition from digital challenger Chase UK, which has attracted more than 2mn customers since its launch in 2021 by offering market-leading interest rates, cashback promotions and a slick app.

Backed by US banking giant JPMorgan Chase, it is expected to launch a credit card this year and expand into Europe. Chief executive Kuba Fast says Chase UK was in “a unique position”, able to offer a fintech-like experience “with the reassurance of an established and trusted bank”.

Merry considers it unlikely that a large bank would acquire a fintech, even though their valuations have moderated. A purchaser would have to put in heavy investment, and the operational risks of adapting tech platforms designed for a smaller pool of customers and business lines to a wider product range and many more clients would be significant, he says.

Alex Barkley, head of strategic partnerships at HSBC Ventures, agrees most big banks would not want to write “a cheque that large”. Listing a fintech on the stock market would also be difficult, given that most still lose money and that the share price performance of challenger banks such as Metro has been poor.

Sir Ron Kalifa, who authored a government-commissioned review into the competitiveness of fintech in the UK, says collaboration between big banks and fintechs would benefit the industry as this would allow the latter to combine their tech and agility with the scale, customer bases and regulatory expertise of traditional banks.

But others argue that the main beneficiaries of the investment that has poured into fintechs have been consumers. “It’s silly to suggest that neobanks have materially challenged the hegemony of traditional institutions,” says Barkley.

“Arguably, their only lasting impact is pushing big banks to improve their own digital platforms.”