New Challengers:
Hot shots head for the saloon

The UK’s banking big guns have every reason to reach for their holsters. The saloon doors have been flung open as new gunslingers stalk in to challenge the old guard. ROWAN MORRISON anticipates the showdown.

The global banking crisis brought calls for greater competition, and Tesco Bank, Virgin Money, Metro Bank and others have been only too happy to step forward. But, right now, they collectively represent only around 5% of the domestic retail market, so how much impact will they really have?

A lot, states Scott Mowbray, Communications Director, Virgin Money. “The financial crisis has tarnished the reputation of many UK banks. Virgin Money will provide a real banking alternative to its customers. Our aim is to make ‘everyone better off’ in the way we do business, by offering good value to customers, treating employees well, making a positive contribution to society and delivering a growing profit to shareholders.”

They’ve studied the competition and aim to fill in the customer service blanks. After the crisis, customers want service and are finding it increasingly easy to change provider to get it. Half of those questioned in a recent Deloitte survey say they’d consider moving their retail bank; more than one in five had actually moved their bank at least once in the past two years; 51% say they’d consider buying financial products from non-traditional banking organisations.

A CFS survey similarly detects a “massive increase” in customers switching from the big names to smaller ones:
since last year, it finds, there’s been a 636% rise in RBS customers switching, 236% of HBOS customers and 165% with Lloyds TSB.

“Different people will want different things from their bank and there isn’t a one size fits all,” warns Eric Leenders, the British Bankers Association Executive Director, Retail Banking. “There’s certainly room for different banking models, but only time will tell whether the features on offer will be a close enough match to attract customers. Success will depend on customers of existing banks being sufficiently motivated to move.”

Some clearly are. This July, Metro Bank became the first High Street bank to launch in the UK in over 100 years, with the emphasis firmly on superior customer service (see Bank with Attitude). Ambitious to “revolutionise the retail banking sector”, it’s just one example of the spirit that motivates all the new players. Post-crisis, the market has actually become more concentrated, Scott Mowbray points out, and this has widened the opportunity for new entrants to shoulder their way in with tangibly better and different forms of banking.

Unlike Metro Bank’s “new start”, Virgin Money has chosen an acquisitive route. It failed to buy Northern Rock, but contented itself with the £12.3m purchase of Church House Trust (CHT), enabling it to provide mortgages and savings products. Already offering credit cards, savings and insurance products, the CHT purchase was the quick way to secure a banking license, Virgin’s first step to establishing a High Street presence. It aims to open 70 branches over the next five years.

Meanwhile, the biggest pretender to the throne is surely Tesco Bank – the brand behemoth with a reputation for gobbling up customers in whatever sector it exploits. Reported to be chasing a 10% share of UK financial services, it’s currently our largest supermarket bank, with over six million customer accounts across 28 financial products and services, and 8% of the credit card market.

This year it launches mortgages and savings products, next year current accounts. Having bought-back its 50% share of the joint personal finance operation it had launched with RBS three years ago, the resultant Tesco Bank has been busily building up its Edinburgh HQ and focusing on the none-too-simple technological preparations for migrating customers to its own customised IT platform.

Conscious of the risks of over-promising in a market that’s so laden with disappointed popular expectations, the supermarket giant is coy about its roll-out strategy in its UK stores. And it seems clear, from its search for an international commercial manager, that it’s also keen to look beyond the domestic market at opportunities for what it calls “in-country banking partnerships” abroad.

Then there’s ‘Project New Bank’, with most recent reports claiming the business is to be floated on AIM, the junior stockmarket, by Lord Levene, Chairman of Lloyd’s insurance market. The plan is to raise £50m from City institutions such
as Invesco, enabling it, like Virgin, to buy a small bank with a license, before issuing further shares to make more acquisitions.

The most obvious acquisition targets right now are the next big planned disposals – the so-called “good bits” of state-owned Northern Rock, and even more significantly, some 600 branches of Lloyds TSB which have been ordered by the European Commission. The market is rife with speculation that France's BNP Paribas and Spain's BBVA might emerge as purchasing frontrunners.

And others are also convinced there’s a real opportunity to expand quickly. A new bank targeting independent financial advisers is to be launched, with the former Chief Executive of IG Index, Nat Le Roux, as Chairman. A team led by Adam Habib, Chief Executive of Jubilee Financial Products, is believed to be looking to raise £50m for its launch.

And, more modestly, a consortium of Scottish business leaders led by Stagecoach founder Brian Souter, has invested to expand Airdrie Savings Bank (ASB) outside its Lanarkshire backyard. ASB received a positive press – and a significant inflow of deposits – at the height of the banking crisis for its ‘thrifty’ and measured approach.

The plan now is to create two new branches over the next 18 months as the Bank celebrates its 175th birthday. “As you’d expect,” comments ASB president, Bob Boyle, “we’re approaching expansion with caution.”

He’s doubtless right to be wary in this fractious market. In February, banking analyst Sandy Chen abandoned plans to raise £200m to launch a new bank, Walton & Co. He’s now apparently scaled-back his goal to raise £80m from wealthy individuals and City investors.

The sceptics aren’t hard to find. A moneysupermarket.com study shows only 4% of respondents would trust a supermarket more than a bank to look after their finances; 65% say they wouldn’t take out a financial product with any of their favourite non-bank brands. However, it also says that convenience is the thing customers look for most, a demand being exploited by internet-only offerings such as ING Direct.

And with August’s announcement that RBS has sold 318 branches to Santander, there’s certainly no need for new entrants to lose confidence. Santander may be a long-established Spanish brand, but it’s relatively shiny new in the UK market, and is definitely providing customers with that vital goal at present – an ‘alternative’ in a market so far characterised
by consolidation.

“We’re entering into a brave new world,” agrees Scott Mowbray, “but there’s much work to be done. A competitive market for banking services will encourage innovation in product design, product distribution, pricing and customer service. A competitive banking market is also important in creating the conditions to rebuild consumer trust.

“Organisations untarnished by the financial crisis have the potential to help restore confidence in the banking sector, and to provide a competitive spur to the established banks.”

With that, the saloon doors swing shut behind him.

Back to Special Report content
Back to magazine content