One unintended consequence of Lehman collapse: The birth of a new kind of bank

September 15, 2018

  • For Revolut's Nikolay Storonsky, various fintech start-ups might not have come about had it not been for Lehman Brothers' fall.

  • Newer banks are taking up a significant chunk of Britain's financial system, Accenture Strategy's Julian Skan said.

  • Customers have come to expect a different kind of experience from their banks in the age of the smartphone.

Noam Galai | Getty Images Entertainment | Getty Images

Revolut CEO Nikolay Storonsky, N26 CEO Valentin Stalf and Monzo CEO Tom Blomfield talk at TechCrunch Disrupt Berlin 2017.


The collapse of Lehman Brothers 10 years ago wasn't just a reckoning for the financial system — it was an epiphany for coders and entrepreneurs who thought they could do better.


Lehman's shuttering not only stunned nervous bankers, investors and savers. It sent shockwaves throughout the global economy; a symbolic fall from grace for one of the many institutions seen as too big to fail.


The day was Monday, September 15, 2008. Lehman Brothers Holding Inc. filed for bankruptcy, and the future of a financial behemoth holding more than $600 billion in assets and that employed 25,000 people was sent into disarray. It was the biggest bankruptcy filing in U.S. history.


"It was a big and powerful investment bank, so the announcement came as a shock," Nikolay Storonsky, a former equity derivatives trader at Lehman, told CNBC by email. "We were told without much warning and it seemed to happen quite quickly."


Storonsky, 34, worked at the investment banking giant — formerly the fourth biggest lender in the United States — for two years. The British entrepreneur feared he would struggle with further employment, being a recent graduate, but soon extended his trading career at Credit Suisse. Fast-forward 10 years and Storonsky is the chief executive of digital banking upstart Revolut, which he founded alongside developer Vlad Yatsenko.


The toppling of Lehman was one event in a two-year crisis. But its impact on capital markets was severe, leading to almost $10 trillion wiped off the market value of global equities in the month that followed.


Lehman's problems were largely attributed to its management of flawed mortgage-backed securities. These were securities that had been given favorable credit ratings from agencies, but which proved problematic as subprime mortgage borrowers defaulted in droves and the housing bubble burst.


The fallout from the bank's collapse resulted in reduced market liquidity, fiscal and monetary stimulus and widespread distrust of the banks.


Bailouts, sweeping regulation and consolidation in the banking sector ensued. New rules meant lenders had to deleverage and increase their capital buffers, a move many believe has mostly guarded the financial system from another meltdown of similar proportions.


But although financial conditions have mostly improved, Revolut's Storonsky believes one ramification remains: that consumers' trust in banks has dwindled significantly, and it hasn't recovered.


"I'd say that the trust in banks is not that strong," he said. "Recent scandals have undermined the biggest names, and I think we're beginning to see start-ups earn the trust of consumers."


Indeed, in the last few weeks two European banks have made headlines over such scandals. Denmark's Danske Bank has been investigating what is rumored to be Europe's largest money laundering scandal in history, while Dutch lender ING lost its financial chief a week after it was fined $900 million.


A new kind of bank

In Britain alone, the number of new banking players in the market has risen 63 percent since 2005, according to Accenture, and entrants have so far captured 14 percent of total revenues in the sector.


"Since the financial crisis, regulation and digital disruption has changed the banking landscape," Julian Skan, senior managing director in banking at Accenture Strategy, told CNBC in an email. "We are now looking at a very different ecosystem from 10 years ago. More competition, more business models and more disruption to revenues."


Skan added: "Although traditional banks still dominate the market, new players... are beginning to generate significant revenues and are challenging the competitiveness of traditional banks."


Revolut counts itself among a number of fledgling digital "challenger banks" — up-and-coming British financial technology firms whose aim is to eat away at the customer base of traditional banks. Such start-up players include Monzo, Starling and Atom. Most have obtained a banking license from regulators and operate without a single physical branch.


But the phenomenon isn't exclusive to the U.K. Germany has N26 and Fidor, the U.S. is home to Chime, and Brazil's Nubank has been around since 2013.


What's changed over the years is that some of these players have transitioned from payment upstarts to regulated banks worth hundreds of millions of dollars. In fact, Revolut is now valued at $1.7 billion after it raised $250 million earlier this year. And Monzo is gearing up for a fundraising of its own later this year that would land it a valuation of up to $1.5 billion, according to the Financial Times. The bank declined to comment when contacted by CNBC.


These companies are dipping their toes into nearly every kind of financial service, from current and savings accounts to insurance, credit and wealth management.


For Storonsky, Revolut — and various other fintech start-ups — might not have come about had it not been for Lehman's fall.