Who would switch to a new bank?
Surely the lesson we should have learned in the three years since the banking crisis is to be wary of banks we don’t know, whether newcomers or rapidly-growing former building societies. Yet a phalanx of new banks with no history is presenting itself as the solution to the crisis. Surely we will be too sceptical to use them?
Before the crash, these upstart banks - from Northern Rock to Icelandic deposit takers – based their business model on pricing and lax lending, paying high prices for savings and giving loans with little regard to income or asset cover.
Regulators won’t allow the new banks to make those mistakes again and will demand enhanced reserves to support lending, but if the terms are not more competitive than the old-established (yes, in many cases, rescued) banks’, why will people and businesses move to them? The British may hate their banks but they do not move accounts – and the few (well under 10 per cent who do) tend to be the worst customers and are likely to move again when a better offer comes along.
Perhaps customers have not moved previously because the alternatives are as bad as their existing bank, but – unable to compete on price or terms - the unique selling point of the new banks is unproven claims to provide better service.
The newcomers include US-backed Metro Bank and Virgin Money, each seeking to buy or build branch networks, plus a new company being floated by Lloyd’s of London chairman Lord Levene and an offer by US private-equity group JC Flowers to recapitalise the tiny Kent Reliance building society.
Of those, Metro’s roll-out is too slow to make an impact and it starts without branding, infrastructure or synergies. Virgin has a brand, but failed to buy the branch network that Royal Bank of Scotland is being forced to sell and has no existing IT or other systems to give cost savings. Kent Reliance is too small to matter and Flowers’ structure for backing it will make it hard to integrate any other societies.
Levene’s bank is aiming big – talking of following a £50m Aim flotation with a £2bn-£4bn equity raising – but it needs to buy a business. The 600 branches Lloyds TSB must sell, or Northern Rock, would suit, but if it is outbid on them it remains just a cash shell. Any branding would come with the purchase, as would the infrastructure and management, so it is substituting critical mass for synergies.
And how many Lloyds customers would stay with the hived-off branches rather than return to the parent or another rival? Inertia stops people moving to new banks but it might not stop them returning to an old one.
Compare those attempts to break into UK banking with the business models of two other banks. The 318 hived-off RBS branches are being bought by Santander of Spain, which already has a strong global balance sheet and owns Abbey National, Alliance & Leicester plus Bradford & Bingley. It thus starts with branding and synergies.
Or compare it with Tesco Bank, soon to launch a full range of loans, current accounts and savings products. With 2,800 UK stores and as many ATMs, it needs no branches, so has low costs; it has a customer base selling a third of the UK’s groceries; it has a trusted image, a highly-efficient management machine and a strong balance sheet – plus access to the “unbanked” sector of the community.
Where would you put your money? An unproved new bank, a plodding old bank, the expansive established Spanish bank or the country’s favourite supermarket group?
