Tuesday, 20 December 2011

Is the Northern Rock decision good for banking?



With the recent announcements that Northern Rock is to be sold to Virgin Money is this decision good for banking and good for the consumers?

The decision, from the Government's perspective, is not only about recouping some of their investment (not as much as they would have liked), but also about increasing competition in the retail banking sector.

Whilst the National Audit Office has launched a "value-for-money" study into the sale of Northern Rock to Virgin Money, this will not halt the sale. Virgin Money will take the keys to Northern Rock at the beginning of January. We have to begrudgingly admire the move  by the serial entrepreneur and self-promoter, Sir Richard Branson, that once again he gets all the credit and press attention for a deal but actually puts little of his own funding into the deal and will rapidly get his money back when he gets access to the excess capital in Northern Rock.

Putting aside the potential bargain that Northern Rock represents for Virgin Money, what is its potential for shaking up the retail financial services market?

With the branding and the products that make up the Virgin Group the potential for Virgin Money to disrupt the retail banking market are high - certainly a lot higher than the other players who looked at purchasing Northern Rock. The continued convergence of telecommunications and banking driven by the consumer demand for mobility, combined with the increase in gaming and  the expectation of entertainment, Virgin Money has the opportunity to present a real alternative to the much discredited high street banks. Appealing to a younger, more tech-savvy customer base, the future high earners Virgin Money could have a long term impact on the profitability and growth of the traditional high street banks. By creating a physical presence on the high street, something Virgin Money has not had to date, this will allow it to move into financial products where customers still need the reassurance of the face-to-face experience to purchase, but doing it in a physical outlet that reflects the Virgin brand. Whilst the banks have tried to provide a new branch experience they have always been held back, and will continue to do so, by their brand and what it represents.

Of course whether Virgin Money lives up to this potential is down to the execution of the integration with  and transformation of Northern Rock and this shouldn't be underestimated. But Virgin Money finally has the opportunity with this deal to do what it has always set out to do and that is be a real consumer-centric alternative to the high street banks.