Orange has to spend more to boost loss-making banking business

Orange is taking sole control of its banking endeavour as well as feigning enthusiasm for ploughing extra cash into the outfit.

The French telecoms group has brokered a deal to acquire the 21.7% stake in Orange Bank held by its partner, insurance company Groupama, for an undisclosed sum. The deal, which is subject to the usual regulatory approvals, will see Groupama retain its position as a major commercial partner to the bank, having extended an exclusive deal on everyday banking and consumer credit to 2028.

Groupama’s exit has been on the cards for some time. As Reuters points out, Orange disclosed back in March that it was looking for a new investor, and later chief executive Stephane Richard made it clear that the telco was willing to go it alone in banking should it fail to attract such an investor.

That now seems to be the case. In addition to acquiring Groupama’s stake in the bank, Orange will also provide with a €230 million capital increase, essentially to fund its future development. Naturally, it is putting a positive spin on the news, but one cannot help but speculate that it would have much preferred a new partner to stump up the cash.

However, the money is coming from Orange, which remains wholly committed to its foray into the world of banking.

The new investment will “speed up the growth projects envisaged in the bank’s strategic plan,” the telco declared, adding that the acceleration comes on the back of the bank’s success to date.

What that actually means is 1.6 million customers in France and Spain signed up over the four years since Groupama Banque relaunched as Orange Bank, half of which are banking customers and the other half insurance; the telco did not share how much crossover there is between these two categories, but it’s safe to assume at least some. It’s not a huge customer base, but its a solid start; banking is a tough nut to crack, after all.

Orange says it is signing up customers at a rate of 40,000 per month and by the end of the year will have extended €1 billion in loans. It claims Orange Bank is one of the top five neobanks in France – and that’s a fair amount of competition right there – and notes that unlike its neobank rivals, which have manly adopted free-to-use models, more than 90% of its new customers are taking billed services.

The financials are less-than stellar, but according to Orange are on the up. Orange Bank, which is reported as ‘mobile financial services’ as of the end of last year, brought in €53 million in revenues in the first half of 2021, but hit EBITDAaL to the tune of €56 million, which is an improvement from a negative €72 million in the same period in 2020.

“Orange Bank should significantly reduce its losses in 2021 thanks to an increase in NBI (Net Banking Income), up 57% in H1 2021 compared with H1 2020, and decreased management costs owing to investments in the bank’s processes over the past three years,” Orange predicts. “This trajectory – which includes substantial investments to create a new, modern, digital bank in line with Orange customers’ expectations – was planned from the outset. The rate at which the bank is moving towards breakeven is comparable, or faster, than that of its peers in the neobanking industry,” it added. It did not reiterate its previous prediction of EBITDA breakeven for banking operations in France and Spain in 2023 though.

The telco is also upbeat about the cross-selling between its banking and telecoms services. It claims that in France the average spend per customer who has subscribed to an Orange Bank payment facility has doubled – although it did not state whether that included the banking fee or not – while in Spain the churn rate for customers subscribing it Orange Bank has halved. The latter in particular makes a lot of sense; customers willing to trust their telco with their banking or insurance needs are probably fairly loyal in the first place. It’s an interesting statistic though.

There is perhaps just a hint of Orange ‘protesting too much’ in this latest banking announcement though. The service is clearly working well, but it’s not a complete game-changer for the telco. And having to spend more money on it at this stage might well sting a bit.

Nonetheless, Orange insists that accelerating the development of the bank is its decision, noting that it will spend on its platform “to maintain its technological edge” and is carrying out a tender process for new insurance offers. It also points to its recent acquisition of neobank Anytime, which boosted its offer for small businesses, and the partnership it inked with Younited in June to boost its consumer credit offers.

There’s no doubt Orange Bank is making progress; the question is whether Orange is over-egging it a bit.