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CEO ClearBank: We’re borne out of the fintech revolution


6/2/2023 | 14 minutes to read

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PPF Group was a co-founder of ClearBank back in 2016. Today ClearBank belongs to major neo-banks in the UK. It provides mainly fast and reliable payments, competing with the largest traditional banking institutions. Compared to the majority of fin-tech start-ups, Clear Bank has already reached break even. It has GBP 3 billion in assets and is poised to expand to other European markets this year. „We applied last November for a banking license in the Netherlands and we hope to get the license in the second half of this year“, says ClearBank CEO, Charles McManus in the interview with SZ Business.

Are you a bank at all, or do you just make payments?
We are a fully licensed bank. But we don't do everything that regular banks do, i.e. loans, deposits, mortgages, retail banking, etc. We want to be the world's best in transactional payments and clearing, based on the latest cloud technology.

In the UK, you can have a banking license and not make any loans. In Europe and the US, you must provide lending when having a banking license.

So you make money by providing payments that are faster and cheaper than your competitors?
Yes, but there's more. We provide real-time payments, also more resilient, thanks to the cloud and other innovations in the banking world. We enable our customers to create new products that they can't do with other traditional clearing banks.

Banks have been operating in the UK for around 300 years and I wonder why they cannot make real-time payments.
Let's go back to 2016 looking at the rationale for ClearBank. There used to be 16 clearing banks in the UK, there were names like Midwest, Midlands, Williams & Glyn. All of these banks have effectively become the big four of Lloyd's, HSBC, NatWest, and Barclays through market consolidation and are built on legacy technology. All of the payment infrastructure that they offer to clients is very similar, the costs are basically the same, poor service, batch processing of payments rather than real-time, etc.

We are coming out of the fintech revolution. All frontend applications (i.e. those used by the end customer, ed.) are trying to give clients something new, to simplify the customer experience. But then they connect with the big four banks and the customer experience is ruined.

We said, let's build a bank on a modern technology stack, connect it to all payment rails, and service those banks with that API that the rest cannot. That was the reason why we founded the bank. And we recognise that this is not just a UK issue, but a global payments issue.

I'm a bit surprised that real-time payments don't work in the UK, because we have them in the Czech Republic.
I know it sounds unbelievable. There are 28 countries globally currently putting in faster payment infrastructure, including the Czech Republic. The US, DACH for example, does not have real-time payments.

Does your revenue come mainly from banks?
Exactly. In order to, we targeted the regulated financial institutions in the UK to start with. These are authorised payment institutions, EMIs, credit unions, banks, and building societies. If they are not a direct member of the payments schemes, they need to go to a clearing bank to clear their customers' payments on a daily basis.

When we first started, we were very much targeted to EMIs authorized payment, new fintechs. As we developed the business, we then approached larger and larger clients. For example, we will soon disclose that we have started working for a huge US payment company. They are launching a new corporate card in Europe and they wanted a bank that could provide the right clearing technology capabilities, and they selected ClearBank to do that.

If even the biggest banks are using legacy technology, is the potential huge for you?
The addressable market is huge, because what we haven’t talked about yet, is moving from clearing to embedded banking. Let me explain. If you look at the UK SME banking market, you have all the traditional players like Barclays and Nat West, and also emerging players like Tide.

Tide doesn't want to become a bank (it offers businesses current accounts and financial services including automated bookkeeping and integrated billing, ed.). They want to offer their customers a bank account, a credit card, but they don't want to be a bank. Yet they now serve almost eight per cent of the UK SME market, which is a total of 450,000 SME accounts.

So Tide has partnered with ClearBank, and through the Tide app, if you're a hairdresser or a chiropodist or a plumber or an electrician, you sign up to Tide and then you click a button and you get a ClearBank bank account, but that's accessed through the Tide platform. So our customer is Tide and we take over all their customers. We effectively outsource our banking license to certain third parties. That's what we mean by embedded banking.

So you sell financial services?
Yes, we do. We are now working with all the fintechs and other companies to provide them with bank account services that allow them to pay like a bank even though they are not a bank.

We're moving across a number of industry verticals, so for example in the UK we partnered with Raisin, which provides retail savings, and interest rates savings. Raisin is growing rapidly in Europe and in the US. But in February they will move all of their UK retail savings accounts under ClearBank as part of the embedded banking model. It's a huge billion pound addressable market in the UK and Europe.

Do you just charge a fee for each payment or do you offer a kind of subscription?
First, we charge a monthly fee for the bank account. Second, we charge per transaction, so we charge per faster payment. Thirdly, because we don't do credit transactions in the UK and you have to put cash in your bank account, we pay interest on it.

We hold cash at a pound for pound rate at the Bank of England (the UK's central bank, ed.) and do not move it. We return some of the interest we earn on these overnight deposits back to our clients. So, in short, customers pay account fees, and transaction fees and receive interest.

There is a huge temptation not to hold deposits at the Bank of England at a 1:1 ratio but to lend them out and make money on them, which is a common practice.
Almost every bank does that. Our balance sheet has £3 billion of cash on the asset side. But even if all our customers came at the same time and took money out of their account, all the cash is sitting in the Bank of England, so they would all get their deposits, unlike traditional banks.

Who are your competitors?
Our competitors in the UK are, for example, The Bank of London. They have no customers or products yet. But it's going into transaction banking, banking as a service, so it's one we are watching.

Then there are the big four banks, which are still trying to compete with us, and other new players operating in Europe. For example, Berlin-based Solarisbank, then Banking Circle or Railsr which was RailsBank. They all provide some form of banking as a service or embedded banking products in Europe, but they are not yet strong in the UK.

I bet you'll be bought by one of the four legacy banks. They are too strong to miss this opportunity.
One of the big banks has had a look at us already. We see opportunities for our product to cross border, in Europe, and the US. Because of Brexit, we are already setting up a bank in Amsterdam, which will allow us to go to France, Germany, etc., via a bank passport.

We also want to set up a "dollar leg" so that we can transact in dollars and serve our customers globally.

Have you already obtained a banking license in the European Union?
We are currently working a lot with the Dutch National Bank and the European Central Bank. We are also applying for a license so that we - like in the UK - are covered by deposit insurance. That's why we have to be a bank in Europe. We applied last November and we hope to get the license in the second half of this year. The application consisted of 92 documents and two and a half thousand pages.

In Europe, we will do credit intermediation in connection with payments, but we will not do loans or mortgages, for example.

Do you have the financial means to expand in Europe and possibly the US?
You may have noticed our announcement in October that our UK business is now profitable. This is quite a rarity for a fintech company. We have joined the so-called 5% Club, which is that only five per cent of new banks in the world that ever achieve profitability.

We had a fantastic investor in PPF right from the start. The group funded us from the beginning. Last year we expanded our shareholder base and you will have noticed the transaction with Apax Partners that we announced. We raised £175 million from them, and that's basically money to expand in Europe and the US.

You weren‘t profitable last year. How did you do now?
We're taking on five new clients every month, and in total, we have over 200 new clients in our pipeline. Our first year's income was £1 million, the next year £10 million, then £22 million. Last year we were expecting 40 million, but we made over 60 million because of run rate. We are now at 100 million tight run rates in the UK business. It could easily be £20 million, £300 million or £400 million in the next few years.

A lot of the good performance is due to the higher interest rate environment. I talked about the three legs of our business: account fees, transaction fees, and, of course, interest rates. In terms of inflation, interest rates have been rising, which gave us an additional boost, but we don't want to be dependent on them. Interest rates will go up and then down again. We are trying to build mainly transactional and fee income as the core of the business.

Will shareholders change in the near future?
Not yet. Maybe eventually we’ll look to widen the cap table following the expansion into Europe and the US and if we are going for an IPO. In funding, it’s interesting to look at the mentality of investors. There are more investors knocking on my door now than ever before. They're all desperate for the next round to get in. We are in a very privileged position because we are in profit, but we have to continue to earn the right.

The Apax transaction helped us because it's a famous company. It was like a validation. There is a certain mentality in the private equity space that if one of the big names is in, I should come in, too.

But the main thing to say is that for companies that are not profitable, the value went down significantly last year because of tighter monetary policy. Our bank was immune to this because it is profitable.

What was PPF's investment in ClearBank?
We started from scratch in 2016. At the beginning, it was £12.5m for 35 per cent. So Petr Kellner put in £12.5m, John Risley put in the same amount and we had £25m, the two shareholders with 70% and the management had 30 per cent so that we could get a banking license and build the bank.

Your customers are also crypto companies. The crypto market is bearish now. Do you see a drop in activity?
You are right that the volumes traded in the cryptocurrency market have decreased, but it is picking up again in terms of new products. For us, it's further diversification within our portfolio. Transactions will go up and down just like interest rates.

So we only trade with the best and regulated companies for example Coinbase, Ziglu, Robin Hood, BCB, etc. They must be fully regulated. We have a portfolio of essentially digital asset exchanges that we look after. We only do the receipt and disbursement of funds. We don't take any risk holding cryptocurrencies. We only take on the risk of clearing payments.

But we also focus on developing new forms of payments using digital assets because we have all the infrastructure. Apart from stablecoins, it is the digital currencies of central banks that use tokens as a more efficient means of payment. I'm not talking about gambling on bitcoins, I'm talking about the proper development of payments.

Are you working with central banks on digital currencies?
Yes. If the world moves off the old... I call it a Kodak moment, like Kodak digital printing, overnight. If the world changes, we need to be ready to play a role here in this space, just as we do in the old infrastructure space.

With these companies in the crypto world, we are actively involved with a number of those firms looking at central banks to do digital currencies, tokenized deposits, or stablecoins. Given the one-to-one balance sheet that we hold in cash at the Bank of England, a number of people are approaching us as to why we don't create our own stablecoin.

Unlike the algorithmic and all the rest, which are not backed by real assets - ClearBank is an infrastructure bank that holds all of its cash in a central bank. Anyway, we have an R&D hub in the digital asset space and I see a lot of interesting opportunities, not in crypto, but in the real digital payment carriers.

We now offer a current account, a virtual account, and an interest-bearing account, and in the future we might offer a digital account where you could have a Clear Bank stablecoin in your digital wallet.

How do you see the future of cryptocurrencies? Does it make sense to you?
It doesn't make sense for them to be unregulated and gambling. I've worked in regulated financial services around the world, and I was involved in the financial crisis and cleaning up the mess that was left in its wake.

Financial services cannot be about individuals losing £300,000 in three or four days. From my perspective, building in proper risk management or more efficient payment mechanisms will absolutely not make the use of cryptocurrencies go away. But central banks will never lose control of payments.

We have already seen the failed example of Facebook introducing its own currency.
It’s not gonna happen. In fact, you may have seen recently in the US crisis and after the FTX cryptocurrency crash, when banks simply had to write off their assets. But if you look at the regulation of, for example, issuers of tokenized deposits and whatever, they will probably be held by banks and will have to be regulated. That's all going to come in the regulated sector.

What do you think will be left of the cryptocurrency world?
They have significantly accelerated the digitization of the entire financial services sector.

I'll give you one example, PEXA, an Australian technology platform company, has acquired data on the entire housing stock from the government in the UK on a procurement basis and has it in one database, and they've connected all the mortgage banks to it. They now have 90 per cent of the data on property transfers in their database. We have become their transaction bank.

The way it works in the UK is that you have to wait for your solicitor to tell you that your funds have been settled after you buy the property before you get the keys to the house. There are lots of fees involved in this process. Now with Pexa, you get the keys in real-time as soon as you buy the house.

Pexa wants to go to Europe and wants ClearBank to go with them. On the Pexa platform, you get the assurance that the transaction is secure, removing unnecessary links in the chain like escrow with solicitors and house insurance. One of the most stressful things in life is suddenly a lot easier because technology has been created to do it.

Author: Jiří Zatloukal

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