Thursday, 30 June 2011

Banks enjoy Insurers turn in the spotlight

There will have been a collective sigh of relief from the banks that for once the spotlight has moved off them and onto the insurance companies. For so long the insurance companies have been vocal about how they weren’t responsible for the financial crisis and weren’t like the banks and therefore they shouldn’t have to face tougher regulation and scrutiny just because they are in the Financial Services sector. However what is emerging from the investigation into referral fees paid by claims companies to the insurers demonstrates that some of the behaviours demonstrated by the banks can be seen in the Insurance industry as well.
The high premiums for Payment Protection Insurance  subsidising and artificially depressing the true cost of personal loans (see http://www.itsafinancialworld.net/2011/05/ppi-sign-of-mad-bad-world.html), is seen to be replicated in the world of car insurance. Referral fees paid by claims companies to the insurance companies have artificially depressed the premiums for car insurance. Though whereas with PPI successful claims against the policies were very low (until the intervention of The Banking Ombudsman), claims companies have been far more successful in making the insurance companies pay out, particularly for spurious claims for unprovable whiplash, resulting in car insurance premiums rising, though not as much as they should.
Having been caught sharing customer information with the claims companies, AXA has set the example by declaring that they will stop the practice (though they have said that if the rest of the industry doesn’t follow suit they may have to restart).  The parallels with PPI continue with the new CEO of Lloyds Banking Group, Horta-Osorio, breaking from the other banks and agreeing to pay compensation for mis-selling. The other banks followed and AXA must be hoping that the other insurance companies will also follow.
The initial reaction from the Coalition Government has been that this practice is all right as long as the insurance companies declare it up front. However after strong opposition to this from the likes of Jack Straw, the former Justice Minister, the Coalition’s position appears to be shifting towards banning the practice.
The insurance companies are not entirely to blame. UK consumers are obsessed with cheapness and therefore implicitly encourage companies to appear to be selling products cheaply. Whether it be cheap personal loans, cheap car insurance or cheap flights. Indeed the charges made for the use of credit and debit charges (not related in any way to the cost of the transaction to the airlines) to depress the perceived price of the flights is only yet another example this collusion between the UK consumer and businesses.
To date this has been wilful self-deception on the part of the consumer. The banks, insurance companies, budget airlines and all the other organisations that participate in this game would be doing everyone a service if they moved to a transparent system where everybody is charged the full price for the service or product they are purchasing. On that basis customers would be able to really compare, but then those businesses who aren’t the best wouldn’t want to do it, would they?

Tuesday, 7 June 2011

A flotation the most likely outcome for Lloyds Banking Branches?

                         

                              Chelltenham & Gloucester Mortgage Quote                                                       

When it is reported that Lloyds Banking Group is to dispose of 632 branches it's important to be  clear as to what that actually means.

The number of branches being sold need to result in a reduction in Lloyds Banking Group's share of the current account market by 4.6 percent. These branches need to have average footfall, i.e. it can't be the least successful branches, and they can't be in the grottiest areas.

When the Information Memorandum (IM) is issued to potential purchasers it will contain a list of the branches. As Santander found out when they bought the 316 branches that Royal Bank of Scotland had to sell  as a result of their receiving state funding, bank customers don't like being sold by one bank to another like slaves in a market in Ancient Rome. There was a very vocal outcry and many customers decided to move their accounts elsewhere rather than be forced to become customers of Santander. What is not clear is what will happen if after the IM document comes out and customers find that they are to be sold if large numbers decide to move before the sale, thus diluting the reduction in market share by Lloyds Banking Group. Will Lloyds have to put more branches up or is the deal based on the impact of the market share reduction on the day that the IM is released or have Lloyds built in sufficient contingency in the number of branches they are selling to account for the defectors?

Whilst the talk is of selling the Lloyds TSB branches, there is more than just branches bundled in the offer.

For instance there is Intelligent Finance, the direct bank set up by Jim Spowart, which has no branches.

There is also the Cheltenham & Gloucester branches as well as the Lloyds TSB Scotland branches.

Certainly for the medium term it will have to include the infrastructure to support those branches - systems, data centres, processing centres, back office and staff. The buyer will need to bear in mind that whilst what will be retained will have been through a process of simplification and rationalisation as part of the integration of Lloyds TSB and Halifax, the parts that were never going to be retained e.g. C&G and IF will not have been through that process.

Once the process of acquiring this bundle of retail banking assets is complete there will have to be the multi-year programme of separating the purchase from the mother ship and, potentially, integrating it to the new owner, depending on who buys it and whether they have any infrastructure to integrate it to. This is clearly not a simple task and far more complex that the Santander acquisition of the RBS branches where not only was it one brand of branches but also Santander has a single, scaleable banking infrastructure already in place and experience of integrating many acquisitions across the globe.

Beyond the purchase of a large scale bank,  the issue for any acquirer will be funding the bank. Above the potential £3-5bn price that the disposal will cost there is the question of funding. With the expected mix of branches there will be significantly more loans (largely because of the Cheltenham & Gloucester branches being included where mortgages are the dominant product) than there will be deposits and therefore the purchaser will be expected to need bridging finance which is estimated to be in the region of £10-15bn.

The questions for any potentiall acquirer are how can they put together the funding, will their investors be prepared to wait for the many years before such a venture can break even and how can they assemble a team with enough experience to be able to pull this off?

Of course there is already one team already in place who knows more about the branches, the systems, the funding requirements, the staff and the challenges involved in separation and integration, and that is the team that Lloyds Banking Group has put together to run Project Verde, the disposal of the 632 branches.

In its leader, Paul Pester, you have the experience of setting up Virgin Money, the experience of separating the Bradford & Bingley branches from the rest of the former building society, the experience of integrating Alliance & Leicester into Santander and, most recently, as Managing Director of Consumer Banking and Payments at Lloyds Banking Group.

His COO is Helen Rose. Helen has led the integration of the retail banks of Lloyds TSB and HBoS, so there can be few people who know any more about the challenges involved in that and the details of the systems and infrastructure required to achieve this. Her previous role in the Lloyds TSB retail bank means that she knows the staff and has deep experience of how the bank works.

The combination of Paul Pester and Helen Rose are the dream team not only to sell the business, but also to run the new bank.

Given all the challenges just laid  out, and the fact that Antonio Horta-Osorio, the CEO of Lloyds Banking Group, wants to get the disposal of the 632 branches away as fast as he can, (for the very good reason that it will make it more difficult for the Independent Commission on Banking's recommendation that Lloyds Banking Group should be forced to sell significantly more to be acted upon), the prospects of the outcome being a flotation, rather than selling to a new entrant, look increasingly likely.

Thursday, 2 June 2011

Forget Virgin Money or Metro Bank, Handlesbanken is the real UK contender

File:Metro Bank logo.png   virgin money logo   

One thing that neither Sir Richard Branson or Vernon W. Hill II can be criticised for is their ability to drum up publicity. Over the last few weeks and months the publicity and positioning that Metro Bank and Virgin Money have had as the contenders to take on the Big 5 banks has been phenomenal. Yet these banks have less than two handfuls of branches between them. Metro Bank opened 25,000 accounts in its first year of operation and ran up losses of just under £25m, or a bit under £1000 per account.

Meanwhile there is a bank with over 100 branches in the UK  that has by far the highest customer satisfaction for both Corporate and Personal banking of any bank in the UK and the highest profitability, that is successfully growing and winning business and that is Sweden's Handelbanken. In typical Swedish style they have done this with little blowing of trumpets, marching bands or publicity stunts, but quietly, unassumingly and very successfully. It is Handlesbanken that the Big 5 banks should really be concerned about, particularly for SME and corporate banking.

So what is it that Handelsbanken is doing that is making them so successful?

Well it isn't providing free dog biscuits, it isn't having cash counting machines that look like fruit machines and it isn't about opening up branches in metropolitan areas where no one actually lives. It also isn't about opening branches that look like night clubs or designer hotels. Handelsbanken isn't about making banking sexy - because at the end of the day banking isn't. Trying to make banking sexy is like painting lipstick on a pig.

Handelsbanken's motto is the 'the branch is the bank'. With a highly decentralised model, the important decisions are all made in the branch by the branch manager. The branch staff don't have sales targets, equally there aren't centrally driven product marketing campaigns, so there is a restoration of the relationship between the customer and the branch. There is no need to deal with someone outside the branch. However you don't get this sort of service and relationship from Handelsbanken without transferring your entire banking relationship to them whether you are an individual or a business. Handelsbanken makes no bones about their goal to be the most profitable bank whilst still being able to have the highest customer satisfaction.

When Handelsbanken moves into a town then they ensure that they become part of the community. The bank manager is expected to live in the town and be visibily part of the community. (More challenging when you open a flagship branch in Holborn where virtually no one lives)

The Handelsbanken model will clearly not work for everybody. A branch-based model is certainly more expensive to run than a direct bank (like Virgin Money is, for the moment). Equally as more and more customers expect to be able to do their banking online and remotely then the Handelsbanken model and indeed the Metro Bank model will be attractive to a smaller and smaller market. However as long as there are customers who value a personal service from their local bank then Handelsbanken will quietly continue to be a success.

As the Big 5 banks continue to face pressure from all angles to lend more money, improve customer service and be less avaricious, rather than fearing the noisy upstarts like Metro Bank and Virgin Money they should be looking over their shoulders for the Swedish Weeping Angels are just behind them. Weeping Angel 3.jpg