If the Post Office thinks offering current accounts will be easy, it should ask why Tesco is finding it so hard. If there’s one thing the public likes less than the old banks it is new banks.
Current accounts are expensive to operate. The funds left in accounts may once have given the banks cheap capital, but low interest rates no longer cover the cost. Banks do it as a loss leader for selling profitable financial products or, increasingly, are charging fees.
The banking crisis should have made an already unhappy customer base keen to move accounts. But while Virgin, Metro and Tesco have entered the market, most customers prefer the devils they know.
There are steep barriers to becoming a bank. To succeed, a new bank needs a customer base, a brand, branches, capital and must be trusted and efficient.
Virgin has a brand and, perhaps, trust – but it has had to use partners to provide capital and it bought its branches and initial customers by purchasing Northern Rock. It is thus really a change of ownership – like Santander buying Abbey National and other former building societies – but with a change of approach.
Metro started with no brand, trust or branches - just limited capital and its founder’s American experience. Not surprisingly, progress has been slow.
Tesco starts with a massive balance sheet, thousands of branches, millions of loyal customers, a trusted brand and a past reputation for efficient management. If anyone could succeed in breaking the existing clique of banks, it should have been the supermarket group. Yet launch problems mean that after several years, Tesco Bank is still unable to offer current accounts.
Why should the Post Office think it can do better? It has branches and a brand that is trusted, if not liked. But its customers see it as a place for distress purchases and it is not known for its efficiency. It will rely, as it already does, on Bank of Ireland for the financial expertise and capital.
Perhaps the Post Office can deliver a different demographic – people who don’t currently use banks rather than people who have to change. But Tesco could tap into those too and it is a sector of society that is less likely to provide free capital or buy other financial products. It risks having the cost without providing income.
The Post Office sold Girobank in 1990 because it didn’t fit its business. Returning to active banking is at best a small diversification for a troubled business. The main potential winner is neither the Post Office nor its customers but Bank or Ireland. Even a small increase in its UK customer base could be significant for the Irish bank, but it’s not revolutionary.