What's going on?

Two UK banks reported their financial results on Wednesday � and their contrasting fortunes highlight the threat that so-called �challenger banks� pose to the UK�s traditional �big five.�

What does this mean?

If you live in the UK (especially in London), you might have noticed a bunch of new Metro Bank branches popping up in recent years. In fact, it�s the only new bank on the High Street in over 100 years! Focusing heavily on its customer service, Metro Bank stays open late and even gives out doggie treats. On Wednesday, Metro Bank said it made a profit for the first quarter in its history, coming on the back of revenues that almost doubled over the past year.



On the other hand, Lloyds, one of Britain�s established banking giants, announced a 15% fall in profit. The decline was partially driven by another �1 billion in fines for mis-selling insurance protection to consumers (a.k.a. PPI).

Why should I care?

For the stocks: Metro Bank benefits from not having the legacy issues of the traditional banks.

The PPI scandal, which has been going on for years, has cost Lloyds �17 billion. Other established UK banks have also paid huge fines. Challenger banks are not burdened by such legacy issues. They have also developed their own technology from scratch, while many of the incumbents struggle to modernize their outdated systems (for example, poor IT infrastructure has been a major hurdle to an important sale of one of RBS�s businesses).



The bigger picture: UK banks are at risk if the UK economy falls sharply in the wake of the Brexit vote.

In the immediate aftermath of the Brexit vote, UK bank stocks were among the worst performers. Unlike many UK-based companies, which have significant overseas operations, most banks are inextricably tied to the domestic economy. If people or businesses can�t pay their loans because they lose their jobs, or businesses� profits fall sharply, the banks will lose lots of money.