Showing posts with label HSBC. Show all posts
Showing posts with label HSBC. Show all posts

Friday, 16 May 2014

RBS forced to sell Citizens ending the most successful UK retail banking foray into US market

British businesses don’t have a great track record in breaking into the US retail market. You only have to look at the disastrous foray that the Marks & Spencer acquisition of Brooks Brothers was, Tesco’s humiliating and expensive attempt with the Fresh & Easy brand and, most recently, the failure of Yo Sushi! to realise how difficult it is for firms with strong brands in their domestic markets to make it across the pond.

The retail banking track record is no better with Barclays, Lloyds and Natwest all quitting the US in the late 1980s and 1990s. Losses from the acquisition of Crocker drove Midland Bank into the arms of HSBC. Even HSBC has not been immune to the problem with the disastrous acquisition of subprime Household continuing to hurt the bank to this day.

It is quite ironic then that RBSG is being forced to exit the one reasonably successful move into retail and commercial banking that British banks have made in the US. Whilst Fred Goodwin, the former CEO of RBSG, has been criticised for much of the way that he ran the global banking group (particularly paying over the odds for ABN Amro just as the wholesale markets were closing down) his strategy for building a presence in the US retail and commercial banking sector should be heralded as one his smarter moves.

Rather than trying to take on the large US retail banks where they were, at that time, competing aggressively with each other in New York, California, Texas and Florida, Goodwin decided to build his beachhead in the Mid-Atlantic by the acquisition of Citizens Financial Group. A series of small but strategically significant acquisitions followed that expanded it into New England and the Midwest. Citizens is now the 15th largest commercial banking organisation in the US. Whilst there have been challenges including writedowns following the acquisition of Charter One and recent issues with the way that capital is planned, overall Citizens is a highly capitalised and profitable bank. Yes its capital is under deployed but that is addressable. Indeed its reputation with its customers is far better than RBS’ in its own domestic market.

It is a great shame then for RBSG that due to having to take state intervention and becoming largely nationalised, primarily due to the acquisition of ABN Amro and the disastrous business in Ireland, that RBSG is being forced by the EU to dispose of its ownership of Citizens by the end of 2016.

As the first step of moving towards this in January 2014 Citizens sold off 103 branches in the Chicago area to US Bancorp.

 It has been announced that the next step will be to float or sell 20-25% of its share of Citizens. A flotation is more likely as there have been few signs of interest from potential buyers. However for Canadian, Japanese or Spanish banks that want to significantly grow their presence particularly in the Midwest and given that it is a forced sale it could be an interesting opportunity.

The flotation will help to rebuild its balance sheet, but the sale is what is really needed as that could release more than $3bn of capital, which would help RBSG reduce the government holding in the bank.

This is all a sad ending to what could have been had RBSG scaled back its ambition to be global investment bank.

As a footnote, British banks should not give up on being able to build a presence in the US retail and commercial banking market. RBSG has shown that it can be done. Barclays is having success with its Barclaycard US operation building scale to take on the other cards providers, however this is a monoline not a full service retail banking offering.

The British banks can also look to the Spanish banks, Santander and BBVA which with respectively the acquisition of Sovereign Bank and Compass Bank, are demonstrating that it is possible for Europeans banks to build a presence in the US retail banking market. It takes time, patience and recognition that whilst both the US and European markets have the words ‘retail banking’ in their names that they are quite different.

Friday, 7 March 2014

This is not just any fee-free current account, this is a Marks & Spencer fee-free current account

Marks & Spencer have announced that they are to launch a fee-free current account. The account will have no overdraft fees, the first £100 of which is interest free and a (relatively) low interest rate for overdrafts of 15.9%.  For those who transfer their main banking account to M&S they will receive a £100 gift card. A key attraction for M&S customers will be the loyalty scheme where points are earned for debit card spending in M&S stores and online. It also passes the critical requirement of allowing customers to bank online as well as on the phone or in store.

A key differentiating feature is not charging a transaction fee for ATM cash withdrawals made with the debit card abroad. For both Metro Bank and Nationwide the lack of transactions fees when abroad attracted customers; however that feature was withdrawn and both now do charge fees for transactions abroad.

On the face of it this is a competitive offering and should be attractive to to both M&S and non-M&S customers alike.

This is not a new market entry for Marks & Spencer (they launched their fee-charging account with a similar loyalty scheme in September 2012) but rather a change of their positioning re. free banking. M&S claims that their fee-charging account has been successful with M&S customers, so this does raise some questions as to why they should launch a fee-free product and at this time.

One of the dangers to M&S of having similar current account products with one offering a fee and one not is self-cannibalisation. Will customers of the current fee charging account be happy to see that whilst they are paying a fee other customers are not paying one for what seems a remarkably similar product? Will some of those customers look to switch to the fee free product? M&S is allowing these Premium Customers to switch their accounts to the free one and will even give them a £100 gift card if they switch their main account to M&S.

Of course this is not just a current account this is an M&S current account. Except it isn't. It is actually an HSBC current account as it is HSBC that is not only behind M&S Bank but owns 50% of the bank. While M&S may position itself as being good for current account competition in the UK market, with HSBC behind it the impact on the market share of the Big Four banks will be none.

Another question that M&S will, hopefully, have considered is what types of customers will be attracted to this account? With no mandatory minimum monthly amount that needs to be paid into the account, customers may only open this account for the loyalty scheme and maintain minimum balances or, as Nationwide found with its credit card, only use the card for cash withdrawals abroad. For a current account to be profitable for a bank it is important for it to become the primary customer account where the customers salary is paid into and the mortgage and other core regular payments come out of it. Without high current account balances or large overdraft fees (which the account does not charge) current accounts for banks are loss leaders. For M&S they need to demonstrably see the customers of their current accounts spend significantly more in M&S stores and online than non-current account customers for the bank to be deemed a success.

For those championing an end to so-called free banking, the launch in September 2012 by M&S of fee-charging current accounts was seen as setting an example to others that would help to accelerate the end of so-called free banking. For those championing an end of free banking, this recent news from M&S that they are launching fee-free accounts will be seen as a step backwards delaying the end of free banking further.

So why have M&S made this announcement at this time? There are already successful non-Big Four banks, particularly Nationwide, Metro Bank and Santander (with their 1-2-3 account) as well as HSBC-owned First Direct who have been taking advantage of the delays and the problems that other challenger banks have been facing in getting their current account propositions right. Now however with Tesco having announced that it will (finally) launch its current account offering this summer and Virgin Money expected to launch its basic bank account later this year, M&S is clearly keen to get to the potential switchers ahead of the others.

But why have M&S decided to launch fee free products given the issues and risks discussed above? It can only because of the need for volume. Running a profitable current account business with all the investment in infrastructure such as contact centres and IT, in personnel and marketing requires scale. Clearly M&S, despite their protestations, haven't achieved this with their fee charging accounts and they see this as an opportunity to build a bigger customer base which will reduce the marginal cost of running a bank.

It will only be some months after the launch of the both the new M&S fee-free accounts and the Tesco current account that it will be clear whether this move was good news for M&S' beleaguered shareholders and customers or not.

Sunday, 2 March 2014

Why 0% BT cards and teaser rates have no role to play in customer centric banks

The announcement by Ross McEwan, RBSG CEO, that RBS and Natwest will remove teaser rates from savings products and scrap 0% interest credit card deals is another step on the road to recovery for RBSG. RBSG is not the first banking group to identify the unfairness for existing loyal customers when these types of offers are made to new customers. It is however the first of the Big Five UK banks to make this stand.

Banks that scrap short term special introductory rates on products for customers, while they position this as for the benefit of existing customers are not simply being altruistic. They are doing this because they know that by adopting a customer- rather than a product-centric approach to running their bank there can be a significant improvement in the long term profitability of their businesses.

Over the past few years there has been a significant price war in the 0% Balance Transfer (BT) credit card market. As one competitor has extended the length of the 0% interest period by one month the next has extended it a further month. Six months ago the market thought that no one would go further than a 28 month (2 years three months) period but it has now got to the point where Barclaycard is offering a 31 month interest free period. It could be argued that this is really good news for customers as fierce competition is driving better deals for consumers. However what is interesting to note is that the top three places in the BT card table are all being offered by one of the Big Four banks - Barclays, HSBC and Lloyds Banking Group. With their very large deposit and current account bases they have large amounts of low cost money to lend which they, it could be said, are using to keep other competitors out, particularly the smaller players who have to resort to the wholesale markets to fund these loans. By extending the periods so long it makes it too expensive for smaller players to compete.

But why are the big banks so keen to lend customers money apparently free for so long? There is of course an up front a fee based on a percentage of the balance being paid - in the case of Barclaycard it is 3.5% which is reduced to 2.99% by a refund (nothing like simplicity!). What this gives the banks offering these products is short term fees, which, with interest rates being so low, fee income is particularly important for short term profits. None of the banks that offers these products has a competitive APR (Annual Percentage Rate) for additional transactions. The banks also know that these are customers who do not pay off their credit cards every month otherwise they would not have got a balance to transfer in the first place. Until recent regulation came into place forcing banks to pay off the most expensive debt first (in this case the new transactions not the 0% balance) this was almost a licence for banks to make money as every payment customers made was used to pay off the 0% balance meaning every new tranaction that was rolled over the month end would continue to rack up high interest rate charges. Even with the change in legislation, whilst these cards are positioned as a way for customers to pay off their debts, the banks concerned are certainly hopeful that their customers will continue to use their credit cards accruing the bank interchange and other fees for every transaction as well as building a large balance for when the 0% interest rate expires.

The problem with BT customers is that they have had the nous to transfer the balance for a 0% period. This means that they are likely to be price conscious and therefore when the next good deal comes along or when their free period ends some of them are likely to be off again to the next bank or credit card company offering a good deal. Others are likely to rack up debts that they cannot afford and go into arrears. For a bank that is looking to develop long term mutually profitable relationships with its customers the majority of these are the wrong type of customers. These are not customers who are looking to or have the money to take out other products from the bank. Banks who offer these types of products are, on the whole, product-centric. Banks who the only credit card they offer is a Balance Transfer is not customer centric.

Moving onto the removal of teaser rates from savings products. The primary reason banks offer short term attractive rates is to build volumes of deposits in order to be able to lend the money out to other customers in the form of a loan or mortgage. It is also a way of raising the brand of the bank by getting it into the best price tables, on the first screen of the aggregator websites such as Moneysupermarket.com and getting it mentioned by Money Savings Expert Martin Lewis. However being successful at doing this can have at least two downsides. Firstly the bank can end up with more low or no margin deposits than it has the demand to lend which leads to losses and secondly it attracts price sensitive customers aka, price tarts. The problem with price tarts, as the name implies, is that as soon as the introductory rate expires they will be off taking their money and giving it to the next bank that has decided to get offer a teaser rate. Just like the with Balance Transfer Card these are not the types of customers that a long term profitable bank should be built upon. With both product strategies it is a case of quantity being sacrificed for quality and taking a product perspective over a customer one.

However  it would be wrong to think that there are no downsides to a strategy that strictly adheres to the principle that existing customers should never be disadvantaged over new customers. In 2001 Nationwide Building Society, under the previous CEO, introduced a policy that all its mortgage offers would be made available to both new and existing customers. It resulted in retaining a higher proportion of its mortgage customers than other banks but with significantly impacted profitability. Nationwide has moved away from that purist implementation to a more pragmatic approach. It doesn't seek to be in the top of the price tables for its products but rather it seeks out customers that are looking for a long term relationship with the building society as its Save to Buy offering for first time buyers illustrates. The result has been a very significant growth in profitable business.

Ross McEwen sees the turnaround of RBSG as taking at least another five years. The announcements of the changes to the retail product strategy will potentially have a negative short term effect for the retail bank, but in terms of moving RBSG towards being a customer centred bank these are sensible steps as long as the shareholders and other interested parties have the patience to see them through. What he has recognised is that 0% cards and teaser rates have no role to play in a customer centric bank.

Thursday, 20 February 2014

Challengers salami slice away at established banks dominance

The news that Paragon Bank (with an initial capital of only £12.5m) has become only the second new bank to be launched in the last one hundred years (Metro Bank being the first one), the first one to be authorised by the PRA (Prudential Regulation Authority) and to take advantage of the move by the regulator to simplify the process of setting up a new bank, is hardly going to have banks such as Barclays, Lloyds and RBS quaking in their boots. But is this just one more step in a trend that the big banks cannot afford to be complacent about?

The primary reason that Paragon has decided to apply for a banking licence is not so it can take on the established banks with a full offering of consumer current accounts and mortgages. It is so that it can take consumer deposits as a means of funding loans for the existing Paragon Group business. With interest rates low but expected to rise this should mean a lower cost of capital for the loans that they make than going into the wholesale market. With the experience that Richard Doe, the former ING Direct UK Chief Executive, brings from his former employer the new bank should be a success in competing for deposit balances. The low cost direct model for deposits has already been proven by the likes of the now defunct Egg and ING Direct. Whilst the press release from Paragon may talk about offering loans and asset finance it is clear from the recruitment of Richard Doe that the new bank will be initially focussed on raising the all important deposits.

Paragon Mortgages specialises in the Buy To Let (BTL) market for the residential market and has been very successful at this surviving during the crisis where the likes of Bradford & Bingley and Alliance & Leicester failed. It is this focus on a specific customer segment that gives it the advantage over the Big Five UK banks - Barclays, RBS, Lloyds, HSBC and Santander. It has taken the opportunity to build deep expetise in Buy To Let and are front of mind for mortgage brokers looking to play BTL business.

Competition in the BTL sector was decimated following the financial crisis with many small players and building players going out of business. However competition is picking up again with all of the Big Five, Nationwide and some of the other building societies increasingly attracted by the bigger margins that the Buy To Let market attracts over owner-occupied residential mortgages. Paragon is, to many extents, the incumbent that the other banks have to shake. It should still be able to succeed in this market because it isn't just another business for them it is the only business segment they are in. Paragon does not have the cost of running expensive branch networks distributing either directly or via brokers. As long as they can continue to excel in the service they provide to brokers and to landlords they should be able to continue to punch above their weights against the larger generalist players.

While the politicians champion the idea of a few large challenger banks coming into the market to take on the Big Five banks and reduce their market shares in deposits, current accounts and lending, with the Labour Party suggesting that they will break the banks up should they come into power, a different reality is going on in the market. The likes of TSB (still owned by Lloyds Banking Group but due to float), William & Glynn's (owned by RBSG and, again, due to float) and Tesco Bank attract the most attention from politicians and the media, but in the background smaller niche players have quietly gone about picking off rich segments of the traditional banks market share.

Handelsbanken with its 170 branches, largely in market towns, has targetted SME customers and private customers with above average earnings who appreciate having a local branch with a local manager who is empowered to make decisions rather than leaving it to the computer or Head Office has quietly gone about building a sizeable, highly profitable and satisfied customer base. Aldermore launched in 2009 focussed on SME customers has lent more than £3bn pounds. Metro Bank has focussed on customers in urban areas that like both visiting branches and having extended hours. There are other focussed challengers either already out there or preparing to launch.

Competition to the dominant banks from challenger banks is already here, it may not always be head on and obvious but rather by quietly salami slicing away the better, more profitable cuts from the market share of the established players, while the big banks are left with less desirable segments. It is for this reason the launch of Paragon Bank should be welcomed as just one more step forward towards a more competitive banking market.

Wednesday, 29 January 2014

Back to the future - a return to supermarket banking or the end of banking for all?

The report on the BBC News website that Barclays is looking at potentially closing 400, or a quarter, of its UK branches which was subsequentally retracted and replaced with a statement that Barclays is 'considering closing branches to reflect the that more customers are now accessing financial services online and via mobile devices',  reflects the sensitivity the big 5 banks have to announcing branch closures and comes on the back of a statement in November 2013 that in August 2014 it is to open four branches within Asda (the UK arm of the US supermarket behemoth Walmart), closing the standalone branches in the same towns. The model of putting bank branches into supermarkets brings back memories of the wave of supermarket banking experiments that took hold in the UK at the end of the last century with the launch of Sainsbury’s Bank (backed by Bank of Scotland), Tesco Personal Financial Services (backed by Royal Bank of Scotland) and Safeway Banking (backed by Abbey National). At that time the supermarkets were seen as a serious challenger to the established banks (despite being backed by them) and the world of banking was going to fundamentally change. It was also the time of the tie-up of Abbey National with Costa Coffee to create new and destination branches – very much building on the revolutionary Occasio branches that WaMu (Washington Mutual) launched in the US.
 
So what happened to all these new visions of banking? Abbey National was taken over by Santander who quickly took the axe to the partnership with Costa, Safeway was acquired byMorrisons who closed down the financial services arm and the remains of Washington Mutual following the financial crash of 2008 were acquired by JP Morgan Chase who effectively bulldozed the Occasio branches returning to a far more business like branch format.
 
Tesco Bank (as it became) with its 6.5m customers continues to make significant investments into becoming a full service retail bank. Sainsbury’s Bank bought out the Lloyds Banking Group share (that Lloyds inherited when it took on HBoSfollowing the financial crisis) in May 2013, however it made it clear that it has no intention of becoming a full service bank and is not planning to offer mortgages or current accounts.Sainsbury’s appear to have no intention of turning its supermarkets into bank branches.
 
In the meantime Marks & Spencer launched in late 2012 M&S Bank operated by HSBC offering a fee-paying current account. With Marks & Spencer continuing to struggle with their fashion lines the retailer is increasingly being measured principally as a supermarket. The jury is still out on how successful M&S Bank but there are no indications that it has been a runaway success.
So why is Barclays trying to re-visit the supermarket banking model? The reality is that it has very little to do with wanting to be in supermarket banking and much more to do with finding a way to reduce their costs by closing their branches. Barclays will benefit from the ability to sell or end the lease on the branches and will have significantly lower costs fromhaving an in store branch than a standalone one. It is also true that this move should make it easier for customers to visit their branches. As high streets increasingly become parking unfriendly through the use of parking restrictions combined with prohibitive parking costs where parking exists bank branches are becoming harder to just pop into or even to access (Metro Bank with their drive through branch opened in the mecca that is Slough would beg to differ). Typically supermarkets have large amounts of parking which will make it easier for customers to visit their banks if they are within a supermarket. It is not only the difficulty of parking that is reducing the number of visits by retail customers to banks. The increasing comfort and acceptance by consumers of all ages of carrying out activities online and the increased penetration of smart phones and tablets means that there are increasingly few reasons for customers to visit branches – cash withdrawals, making payments, getting foreign currency, paying in money into accounts no longer require a physical visit to a manned branch. Increasingly it is only at those key life moments such as buying a house, getting married, getting a loan, opening a bank account that a visit to a bank branch is necessary and some of that is driven not by the desire to talk to someone or to get advice but by the continued legal requirement to provide a physical signature on documents.
 
For those important financial transactions such as arranging a mortgage or a loan it is highly questionable how conducive a branch within a supermarket will be to have a meaningful discussionExchanging confidential information over the sound of the tills ringing and the promotional announcements over the loudspeakers is not what customers are looking for. Neither is taking out a mortgage or a loan one of those spontaneous purchases that supermarkets rely on to increase basket size. As a mother pushes her trolley around with her two screaming toddlers in tow she is unlikely to suddenly decide that she would like to talk to her banker about a loan.
 
However Barclays might have liked to position the opening of branches within ASDA supermarkets as for the convenience of their customers, with the review of their branch network (and the denied closing of 400 branches) with no confirmation that all closed branches will re-open in Asda stores, Barclays are making a statement of intent about the role of branches going forward.



Had the report of the potential for 400 branches being closed stood, Barclays would have been credited with the courage to be the first of major high street banks to make its intentions clear. This would have made it easier for the remainder of the big five banks to annouce their own closure plans. The other banks have hinted at their desire to close branches but none have been bold enough to say how many. They will eventually have to do this because it is an undisputable fact that less and less customers visit their branches. Many of those that visit their branches only do so because there are not currently convenient alternative ways to carry out transactions such as paying in cheques. However with the increasing penetration of smartphones with cameras built in even paying in cheques may soon no longer require a visit to a branch.



The future of branch  base banking is at a cross roads where the big five banks must decide whether they wish to continue to support customers who want to use branches or whether they should encourage those customers to move to banks that see branch banking as fundamental to what they do such as Metro Bank, Handelsbanken, Umpqua Bank (in the US) and Bendigo Bank (in Australia). It maybe that the end of the universal bank serving all segments of customers is in sight.

Monday, 27 January 2014

How to be a successful challenger bank


So assuming you have got the capital raised and have got through the regulatory hurdles necessary to be a challenger bank what the critical factors for success?

Pick your battleground. Given that the big five banks (in the UK) or the Four Pillars (in Australia) or the equivalent in other markets are so called because they have the scale and the established track record trying to take them head on at their own game is a sure fire guarantee of failure. To paraphase the Chinese general Sun Tsu in his ‘Art of War’ only attack the enemy head on if you have a three to one advantage.  A bank that wants to take on the banks across their entire retail customer base is setting itself up to fail. The established big players have the depth of capital and the customer base to play the long game and can besiege the challenger bank until they have used up all their capital and their investors patience.

For challenger banks the better strategy is to ‘fragment’ i.e. to pick off part of the established banks’s customer base, preferably one of the more profitable segments.

By not having a clear customer segment strategy but simply competing for business that can be won from the established banks can end up with the so-called challenger winning the unprofitable business that the big five would happily like to exit.  

Handelsbanken have never sought to be a replacement for the big five banks in the UK for all their customers. They have deliberately adopted a strategy that focuses on small businesses in largely market towns where customers like to use branches, have face to face contact and are prepared to pay for that service. The result has been very high customer satisfaction along with high profitability.

First Direct (albeit owned by HSBC) set out to be a bank for customers that weren’t interested in visiting branches, liked to be able to talk to a person, liked a high quality of service and were prepared to pay for it. First Direct is very rarely at the top of the price tables. Equally First Direct has not tried to grow its customer base aggressively with its market share relatively stable and relatively small. What they have ended up with is the highest Net Promoter Score amongst the banks.

Consider competing from a position of better insight. The established banks have the scale, the benefits of a high margin back book and the deep pockets so competing purely on price is not a long term strategy. Neither is competing simply on not being one of them. Some of the legacy problems the established banks have is their data has grown up from individual product systems, there is a culture of not sharing data between organisational silos, their systems have often grown from a series of acquisitions and are based on old technology. This gives the challenger bank a real opportunity. Designing the bank from the start to be based around the customer not the product, designing the data infrastructure around the ability to analyse, model and forecast not only the customer, but the risk, the external environment and the way the business performance will be managed will give the challenger bank a significant advantage. By having better customer insight offers can be better tailored to what the customer actually wants (resulting in a reduced Cost Per Acquisition), pricing can be based on individual or segment risk (not only for lending but also for deposit pricing) and retention of customers can be significantly higher.

A good current/checking account offering is not optional. Without it being a real challenger is impossible. Unless you have a transactional product, one where the customer interacts with you frequently, you are not going to be able to own the customer relationship and whilst you might win in the short term it will only be for that. When you ask any customer who they bank with their first response will be the bank where their salary is paid into and which they use daily to buy goods and services with.

If the basis of competition is around taking  mortgages and savings market shares off the established banks, then effectively regardless of the ownership structure, this is a building society offering. Building societies have been around for over a hundred years and their attempts to be challenger banks can be seen in the demise of the likes of Alliance & Leicester, Bradford & Bingley and Northern Rock.

Nationwide Building Society has shown that by having a good current account offering that they are a real challenger to the established banks. (Nationwide has done more than that as well but the current account has been a key building block to their success).

What’s more the current account offering needs to be designed to attract the customer segment that has been selected as part of the fragment strategy.

Most customers see one current account being the same as another. A lot of customers will also have been made more cynical because of the ‘value-added’ or packaged current accounts that were sold in the run up to the financial crash. These were accounts where it was questionable whether the ‘added value’ was worth the monthly fee. There are very few ways of differentiating a current account but certainly for a challenger bank it needs to be designed for being used on mobile devices such as smartphones and tablets. The established banks, whilst they may have deeper pockets, have old and under-maintained systems which should give challenger banks an advantage (see the comments about IT below)

The danger of coming out with a simple, low function current account is that the challenger bank ends up with the low income, highly unprofitable customers that established banks are obliged by governments to offer to the unbanked. While this may make the challenger bank popular with government it will do nothing to help investors and if that is not the customer segment being aimed for will only lead to brand confusion.

Design the business from the outside in. One of the biggest challenges the existing banks have is their organisation structure which is built around silos, largely product-based and very hard to change. This brings inflexibility and high cost. Challenger banks have a real opportunity to do something different, even if they have come into existence by acquiring an existing player. The way that the bank’s processes are designed should be driven by the experience that its customers, partners (intermediaries, aggregators, suppliers) want and then decide how it can be delivered profitably. Experience doesn’t just apply to getting a customer to purchase a product but also what happens after that. On-boarding is even more important now for retention, profitability and customer advocacy, particularly where business comes from brokers or comparison websites.

What typically happens is that organisations where there is any conscious design are built from the perspective of the bank and how it is easiest to manage, not from the customer’s or strategic supplier’s perspective. The challenger who gets this right will only be able to attract customers at a lower cost (reduced CPA), will reduce customer attrition and achieve higher customer referral rates.

Invest in talent and experience. Everybody thinks they are an expert in retail banking because everyone has a bank account. This is the equivalent of saying that everybody is a doctor because they have a body. If retail banking was really that easy and that profitable there would be no need for challenger banks. It is not only since the financial crash in 2008 that people have looked down on bankers and treated them as of less value than estate agents or tabloid journalists. Prior to the crash many banks employed retailers because they thought bankers were just staff who didn’t know how to sell properly. A probable consequence of the introduction of this retail talent was the PPI (Payment Protection Insurance) and the Structured Investments scandals, where sales techniques borrowed from the retail industry were applied to the banking industry. There is no doubt that the banking industry can benefit from the insights and experience of industries that deliver better customer service and use technology more smartly but that needs to be counterbalanced with deep experience of retail banking. Current account-based retail banking is far from the same as simply attracting deposits and selling mortgages. If retail banking was so easy why have the building societies (Nationwide excepted – see comment above) been so unsuccessful in making a significant dent in the established banks market share? To be a successful challenger bank investment in real expertise of current account banking is not optional.

Just because technology can do something doesn’t mean customers want it. There are plenty of digital gurus out there who are coming up with very imaginative ways of doing banking whether it is different ways of making payments (at least once a day someone somewhere in the world announces a new way of making payments), identifying the customer, wearing technology, and interacting in branches, but just because you can do it doesn’t mean you should. Unless it makes it more convenient for the customer (and many of the novel ways of making payments are cool but take longer than conventional ways of paying) then don’t do it. Being sexy is not a requirement to be a challenger bank.

Start from the goal of zero IT ownership - exploit the cloud, SaaS and outsourcing. The established banks have very expensive and old IT systems which they need to maintain. This comes from the legacy where banks were amongst the first organisations to use IT and therefore had no option but to build up their own expertise. With the maturity of the both the IT and the outsourcing industries there is no reason for banks to own or manage their own IT. Given the problems established banks have had with their legacy systems over the last few years their competency as an IT provider has been seriously tested. Not only does putting IT out to third parties save overall money but it also allows the challenger banks to focus on what is important and that is the provision of banking to their customers.

For many banks using the cloud to provide banking services has been unthinkable. However Commonwealth Bank of Australia (CBA), the former public sector bank, has its internet banking hosted by Amazon. (See http://www.itsafinancialworld.net/2012/12/commonwealth-bank-of-australia-run-by.html) If a traditionally conservative bank has done that why wouldn’t challenger banks adopt that approach?

Metro Bank, one of the challenger banks in the UK, has bought the use of its core banking service on a per transaction basis (SaaS – Software as a Service). Its IT is outsourced. When the time it took to Metro Bank to launch its current account is compared with Tesco Bank (which is building its own platform based on a core banking package) then there is a clear argument for considering SaaS.

 Taking modern technology and commercial approaches should give challengers a great advantage; however it isn’t always turning out that way.  A number of challenger banks are being created by the acquisition of assets from existing players. They would argue that by having existing proven platforms that they can be up and running faster than starting from scratch. This is true in the short term but rather than being able to offer a truly differentiated service what they offer is a smaller but more expensive (due to the smaller scale and, in some cases, having to pay one of the big 5 banks to support the IT) version of the established banks. This is the situation that both TSB (the former Verde Lloyds Banking Group 630 branches) and William & Glyns (the 316 RBS branches) find themselves in.  (See http://www.itsafinancialworld.net/2013/07/can-tsb-be-challenger-bank.html) In the longer term this is not a viable solution for a challenger bank.

Challenger banks who have acquired legacy IT, need a transformational CIO working alongside the bank’s executives, to put in place a plan to get off the legacy and onto modern platforms enabled for mobile and digital as quickly as possible. They also need to be experts in strategic supplier management. The challenger banks need to educate their investors that this is not optional.

Have an exclusive relationship with major investors and get them committed for the long haul. There are plenty of hedge, private equity and sovereign funds who are interested in investing in challenge banks, however a number of them have placed investments in more than one challenger bank in the same sector in the same country. What does that say about their commitment?

To build a sustainable challenger bank will take time particularly given the limited availability of off the shelf banking technology and the time it takes to implement a new business model. Equally getting a return on these investments is not going to be quick, so investors who aren’t in for the long haul should be politely shown the door.

This isn’t meant to be an exhaustive list of what a challenger bank should be looking at but highlights some of the areas where the difference can be between success and failure.

Saturday, 11 January 2014

Removing incentives won't stop bank mis-selling


The news that Lloyds Banking Group has been fined £28m ($46m) by Britain’s FCA (Financial Conduct Authority) for having a bonus scheme that put pressure on sales staff to mis-sell products once again brings the spotlight to bear on the culture of banks and specifically, in this case, retail banks.  In Lloyds’ case it was not only the benefits of meeting or achieving targets that created inappropriate behaviour but the sanctions for missing targets including demotion and base salary reduction that put staff under pressure. For at least one sales person they felt under such pressure not to fail that they inappropriately sold products that they could not afford to themselves and their family as well as their colleagues.

The typical media and political response to incidents such as this is to suggest that incentives are bad, that remuneration shouldn’t be related to achieving targets as incentives lead to the wrong sets of behaviours.

However simply removing the explicit link between sales performance and pay will not remove the pressure to achieve sales targets.

The pressure comes right from the top. While the new CEOs of banks may publicly talk about changing the culture of banks, putting the customer at the heart of the bank, winning through providing a differentiated service and they may be completely sincere in those sentiments, by the time that that message is passed down through the organisation to the sales people at the frontline it will be measured in terms of targets, which will need to be achieved. Anglo Saxon businesses are run with a performance management culture where achieving or exceeding targets and  giving greater rewards to those who meet those targets than those who don’t  is fundamental to how those businesses operate. While it may never have been the intention of Antonio Horta-Osario, CEO of Lloyds Banking Group, that the staff be put under such pressure that they coerced customers into buying products that they did not need, by the CEO setting his or her direct reports stretch targets that was the almost inevitable consequence.

The reason for this is simple: banks are commercial businesses that have investors who are looking for returns and always have the option to invest their money elsewhere if the return is better. As such CEOs of banks are competing for investment and are accountable to their shareholders. This applies as much to new entrants and challenger banks as it does to the established banks. All of the new entrant banks without exception have investors backing them whether it is parent companies such as retailers, hedge funds, Private Equity funds or individual wealthy investors. Even the building societies and mutual have to look to the external market for capital and those who lend capital have options as to where they lend to and are doing to achieve competitive return.

But is a culture that is about beating the competition, about achieving the best that you can for your organisation really such a bad thing? Certainly the impression that many politicians gives is that yes it is. The sentiments being expressed have strong parallels with the period where some schools banned competitive sports because politicians believed they were harmful to children.  It wasn’t good for children because it meant that some of them would have to experience losing.

The politicians who rally against the banks and banker compensation schemes can’t have it both ways. On the one hand they say don’t want those in banks to be incentivised to sell customers products but on the other hand they want competition. Competition by its very nature requires a level of aggression, it requires you to play to win and for your opponents to lose.

To demonstrate that they are not solely focussed on financial outcomes most banks today use a balanced set of financial and non-financial measures to monitor the performance of the bank and their employees.   Typical non-financial measures include Net Promoter Score (NPS), customer satisfaction, numbers of complaints and staff engagement.  The argument being that by having a balanced set of measures sales staff are incentivised to treat customers fairly and to only sell customers what they need.

Some banks such as Barclays and HSBC have removed all financial incentives for their staff to sell customers products. Instead their staff are paid a basic salary with the ability to share in a bonus depending on the performance of the bank. However, even when that is the case, every customer facing bank employee who has responsibility for helping a customer to apply for a mortgage or open a savings account knows that, at the end of the day, when it comes to the annual performance review whether they have achieved or missed their financial targets will always be more important than whether they have achieved their non-financial ones. They know that their opportunity to receive a pay rise, to get a bonus or to progress their careers is dependent upon their ability to deliver profits for their bank. The financial incentive may not be explicit but it is still there.

There exceptions to this.  A bank that has taken a very different approach is Handelsbanken. At this bank if the profitability exceeds the average rate of its peers, then surplus profits are put into a fund and distributed to all the staff. However they can only receive these accumulated benefits when they turn 60, thus encouraging long-term thinking and loyalty. The staff, including the executives, have flat salaries with no bonuses. There are no sales or market share targets. Handelsbanken has very high customer satisfaction and is highly profitable. The bank has had no problems with mis-selling or wrongdoing.

However this model will not suit everybody. This is very much a Scandinavian model and the pace of growth whilst highly profitable will not be attractive to all investors. Detractors of this approach will argue that no highly talented executive would be attracted by this reward model when there are banks across the globe prepared to reward more in the short term. The sustained excellent results that Handelsbanken have delivered speak for themselves.  Handelsbanken  would probably argue that it has no desire to attract the sort of executives who are interested in only the short term and will move from bank to bank simply for better rewards.

Given that the reality is the Handelsbanken model cannot and should not be imposed upon all banks, what is the answer and how can this type of mis-selling be avoided in the future?

The reality is that it will never be totally eliminated. Indeed if there were never any complaints or if there were never any practices that could be open to question it would suggest that the hunger to be the best, the passion to grow the business was missing. Every sportsman who wants to be the best knows that you have to go the edge to succeed.   There will always be employees who are too aggressive or dishonest. It is that they are identified and the way that they are handled that sends out the signal to their fellow employees as to what is acceptable behaviour. That has to be called out loud and clear and demonstrated by actions from the top of the organisation.

Secondly, while many banks operate a balanced scorecard of financial and non-financial metrics to measure the performance of the bank, the financial rewards need to be truly aligned to that Scorecard and not just to the bottom line. Not only must reward be aligned to the scorecard it needs to be seen to be aligned. This means that for instance if customer satisfaction or employee engagement scores are part of that scorecard and those measures are not met or regulators impose fines despite financial targets being met, that the executives’ rewards are significantly financially reduced. This is something that has not been reflected across the banking industry despite the enormous financial fines handed out to the likes of JP Morgan and Barclays.

Thirdly there needs to be a recognition by investors that the days of retail banks being a licence to print cash are over, that most banks need significant investment both in terms of capital to fund the business but also to provide the infrastructure that a bank needs to have to compete in the 21st century and finally that an investment in a bank is for the long term – measured in double digit years.

Changing the culture of retail banks is not as easy as simply removing incentives, neither it is something that can be done overnight. To have a vibrant and competitive banking industry there needs to be some friction and a world without it will be a lot worse for the consumer.

Saturday, 12 October 2013

Why the new Payments Systems Regulator needs to avoid rushing in change


The UK government has announced that the bank dominated Payments Council is to be replaced by a competition-focused utility style regulator for payment systems, under the Financial Conduct Authority (FCA), part of the Bank of England. This new body will assume its powers in late 2014 and will be fully operational by Spring 2015. The focus will be on providing competition, innovation and responsiveness to consumer demands in the payments system. It is hoped by the government that the Payments Council will in turn reform itself into a more traditional trade body.

Talk of reforming the payments system has been going on for a very long time with the Cruikshank Report into competition in banking  back in 2000 recommending the setting up a full blown payments regulator, the so-called ‘Payco’. That recommendation was never acted upon, not only because of the active lobbying by the banking industry but also because of the size of the investment required to set up the regulator and the fear of disruption to the payments system in the process. Little progress has been made since 2000 except the slow introduction of Faster Payments and the reluctant abandoning of end of cheques, which had been due in 2018.

The new Payments Systems Regulator may want to show that whilst the creation of the body has taken a long time that it is a body with a mission and at pace. However whoever heads this body should be wary of rushing in change too quickly.

The UK has one of the best set of payments systems in the world – in many ways the envy of the rest of the world. After 9/11 it wasn’t the fact that the Twin Towers had come down or that the US had been attacked on its own soil and that hundreds had died that nearly brought down the US economy, but rather the grounding of all the airlines. In the US at that time (and even today)  because the economy was highly reliant upon cheques (or checks if you are outside the UK) the fact that the planes could not fly the cheques raised on one bank to deliver them back to their originating bank for clearing meant that the US economy almost ground to a halt.  The flow of money was stopped. Given similar circumstances in the UK the impact on the UK economy would have been far less. The UK has a highly resilient, highly reliable payments infrastructure. Britain should be proud of the long history of a payments infrastructure that is only invisible to most because it works and customers take it for granted that when they make a payment it will arrive where it is meant to in the time that it is meant to. This is despite the fact that the systems have, primarily, been built by those 'empires of evil', as portrayed by the politicians, the big four banks (Barclays, Royal Bank of Scotland, Lloyds Banking Group and HSBC).

However the UK payments infrastructure has been slow to change, has failed to grasp innovation and has had to be dragged and screaming towards the twenty first century. The Payments Council dominated by the Big Four banks has had the unenviable task of leading by consensus and with each of the Big Four being competitors has rarely got to consensus and where it has it has been through a suboptimal compromise.

The new regulator has the challenge of addressing the level of competition in the industry, increasing the innovation and making sure that the consumer’s voice is heard.
Despite all the reviews and all the parliamentary committees which have reviewed and reviled the banking industry, a forensic analysis of the payments industry has not really been carried out. Whilst the small banks and building societies who process low volumes of transactions and the new challenger banks may complain they are unfairly charged for access to the payments system the arguments seem to be based on little data and a lot of emotion.
One of the first tasks that the new regulator should commission is an independent, forensic analysis of the costs to both build and operate the existing infrastructure. The natural instinct will be to use one of the Big 4 accountancy firms to do this, however they are so dependent upon fees from the big banks that it is questionable whether they will be seen to be independent. The purpose of this analysis of the costs will be to determine what a fair cost to use the infrastructure should be (allowing for investment to build the next generation infrastructure) and compare that against what is being charge today.
The new regulator has an unenviable task because there is a clear conflict between significantly reducing the cost of using the infrastructure and encouraging investment and innovation into that infrastructure. It is analogous to Ed Miliband, the UK leader of the Labour opposition, saying that he will freeze the cost of utility bills whilst still expecting those utilities companies to invest in green technologies and maintaining and upgrading the creaking infrastructure.
This brings into question whether there can be real and speedy investment and innovation into the payments infrastructure while the big four banks still collectively own it. Over the last forty or so years they have demonstrated that getting to consensus has inhibited progress and has compromised innovation. There has also been a chronic lack of investment in building the next generation infrastructure. Is there any reason to believe that this will change?
The new regulator needs to decide whether the three objectives assigned to the regulator of creating competition, encouraging innovation and responding to consumer demand can be met while the ownership of the payments infrastructure remains with the big four banks.  A solution could be that the big four banks are forced to dispose of the payments infrastructure to an independent business to which they will become customers just like the smaller banks, building societies and challenger organisations. The acquiring organisation will need to demonstrate not only that they have the experience to run the infrastructure the resilience and reliability of which  is of national importance but also have a realistic strategy for the payments industry going forward and how they will fund both innovation and maintenance of that infrastructure whilst actively engaging with consumers. This is not a task for those who are looking for a quick in and out with a healthy profit. Only an organisation that is prepared to run the infrastructure independently of the banking sector for the long term will make any sense.
Without taking a measured, fact driven and courageous approach to changing the payments industry with cross-party support (given the length of time any programme will take to enact) this regulator will be no better than the Payments Council it is replacing. 

Tuesday, 16 April 2013

RDR reducing access to advice for customers



The Retail Distribution Review (RDR) introduced by the UK Labour Government was aimed at improving the quality of advice provided to customers and the transparency around the charges for that advice.

With the annoucement first by Barclays in January 2011 and then by HSBC in May 2012 of their withdrawal from providing investment and Life & Pensions advice to the mass market, rather than help the customer, RDR has in fact reduced customer access to advice. Both banks have stated that the reason for their withdrawal has been that the business is no longer viable for them commercially. The additional cost of training their staff to meet the high standards laid down by RDR and, undoubtedly, the size of fines and the risks associated with mis-selling of these products, has made it unattractive for them to continue in this business.

RBS is neither fully exiting or getting behind branch-based mass market advice. Their announcement that they will be laying off 618 advice based staff is a reflection of the reality that if you move from what is perceived to be a free service (even though consumers are paying commission through the annual fees hidden in their investments) to one which is fee-based inevitably volumes will drop.

Lloyds Banking Group had been saying that they would continue to provide advice to mass market customers. However when they asked customers  about this what they  found "for the majority of our customers, demand for a fee-based financial planning advice service decreases when they have lower amounts to invest,". As a consequence they have announced that they will only be offering advice (for a fee) to those with more than £100,000 of investable assets. They will continue to offer a non-advised service through the Halifax, Bank of Scotland and Lloyds TSB branches. Around 1,000 branch staff will be impacted by this change and will be offered either a new role or redundancy. Given this move by Lloyds Banking Group the argument for selling off Scottish Widows becomes even stronger (see http://www.itsafinancialworld.net/2012/05/why-lloyds-shoudnt-dismiss-selling.html ).

Interestingly Santander is taking a contrary position and on hearing of the layoff of the HSBC staff allegedly approached HSBC with a view to hiring those laid off.

However even Santander is now reconsidering this position. In February 2013 they are being investigated for giving poor advice following mystery shopping by the FSA uncovering poor practices. Shortly before Christmas 800 advisers were suspended for retraining. A review of strategic options is now under way. In March 2013 this concluded with the withdrawal of face-to-face advice for new customers, putting at risk 874 jobs. A new team of 150 advisors will be deployed to serve existint customers.

In April 2013 Clydesdale, Yorkshire and Co-op announced the withdrawal of advice from their branches. In their case this was supplied by Axa. According to the Financial Times, Paul Evans, chief executive of Axa UK, said he was “very disappointed” that the division “must also now withdraw this service having not found a model which balanced the regulatory requirement that the service be profitable in its own right, whilst setting advice fees at an affordable level.”

The exit is not only being seen amongst the big players in the market. The building societies are also withdrawing from the market. In early 2011 Norwich  & Peterborough Building Society sold their sales force to Aviva and withdrew from the market. There are also large numbers of IFAs (Independent Financial Advisors) who due to the cost of funding the training and the amount of studying are withdrawing from the industry, again reducing accessability to advice for the lower to middle income customers.

This is creating a very serious problem. With all of us living for longer and the cost of living, particularly in the later years rising, with the reduction in employer provided pensions benefits, there is an increasing need for individuals to save for the longer term, to invest in individual pensions and to provide for their loved ones through life assurance. With the options complex and becoming more complex there is an increasing need for advice, however what RDR has done is reduce access to that advice.

With the availability of advice for investment products being reduced the current UK Government is now putting in plans to reduce the accessibility of advice for mortgage products. Similar to RDR the Mortgage Market Review (MMR) set out to protect customers but is fact making it far more difficult to get advice. For instance should a customer phone up a bank such as First Direct and ask about mortgage products the bank employee will not be able to talk about the difference between a fixed-rate mortgage versus a variable rate mortgage since that would be seen as advice and without completing a fact find that will no longer be possible. This could once again, see mortgage advisors and brokers withdrawing from the market.

Not all banks are withdrawing from either the investment market or the mortgage market. There are those who are considering the commercials and rather than quitting are looking at innovative ways of improving productivity of their advisors. Both Bank of America and Bank of Moscow have pilots out using videoconferencing to bring the advisors virtually to the branches. With the increasing acceptance of videoconferencing through the likes of Apple's Facetime or Skype, the availability on devices such as the iPad, then those organisations with the imagination may still be able to find ways to commercially provide advice to the mass market.

Of course videoconferencing does not overcome the requirement to have fully trained and qualified advisors, since selling through videcconferencing is no less regulated than through branches or contact centres. What it does mean though is that through the higher productivity brought about by the advisors being able to support multiple branches less advisors are needed and the cost of providing advice is therefore reduced.

What RDR shows, once again, is that when governments with all good intentions create regulation for the Financial Services sector the effect on customers is often the opposite of what they intended. Governments should spend more time considering and discussing regulation with customers and the industry (and not instantly assume that whatever the banks say is wrong and out of self-interest) and resist the temptation to rush out populist regulation.

Friday, 1 February 2013

How did Citibank get European retail banking so wrong

According to Reuters Citibank is looking to pull out of consumer banking in a number of countries beyond Pakistan, Paraguay, Romania, Turkey and Uruguay, which they announced in December 2012. The withdrawal is all part of new CEO, Michael Corbat's strategy to get Citibank back into shape.

The reasoning given behind the withdrawals is that these are countries where Citibank has not managed to build sufficent market share to be a significant player or to make sufficient profits from. This is not unlike the argument that 'the world's favourite bank', HSBC has been making for some time (see http://www.itsafinancialworld.net/2011/05/hsbc-goes-back-to-its-roots.html ). However where HSBC has from its beginning been a bank that supports world trade and has successfully leveraged its global brand this is not what Citibank has done with its consumer banking strategy, particularly in Europe, but also across the globe.

When Citibank has entered a European country it has not been part of a joined up global or European strategy, it has been on a country by country basis. It has usually led with either its Citifinance, the finance house brand, or a mix of Citifinance and its mass affluent brands. 

One of the challenges with entering with a finance house brand is that in many markets it tends to attract customers that cannot get a loan from their main bank or they have to compete on price. This has proved to be the case in a number of the countries that Citibank is looking to address.

Citibank with its Citiblue and CitiGold segmentation was aiming to attracted the premier banking segments, but this was in many ways conflicted by leading with the unsecured loan product.

Citibank has tended to enter these markets with a standard offering not tailored to the local market and not recognising the nuances of these markets. In Germany, for instance, the tendancy of customers to have their current account and savings with a local or regional savings bank, meant that Citibank has, to a large extent, ended up with a loans business that is made up of customers that the local German banks would not lend to, resulting in a low quality book. Citibank as long as it wanted to leverage the power of the global brand was never going to be seen as a domestic bank, so in Germany the strategy it adopted was to compete on price and/or availability of lending.

In Spain, one of the most over-banked countries, where it feels like every other high street outlet is a bank branch (or at least until the financial crisis) and where there has been a lot of innovation in branch formats, Citibank opened very standard, unappealing branches. Going to a bank in Spain is often a social event, but the standard design that Citibank chose to deploy meant that from the street visibility into the branch was minimal and far less welcoming than their local rivals. Without branch footfall in Spain it is difficult to compete in consumer banking.

Citibank failed to recognise in Europe that  one of its  brand's greatest strength is its global nature and its payments infrastructure. If Citibank had recognised the entrepreneurial flair of European migrants and the share of their wallets that flows  from and to the home countries, then their market share of consumer and SME banking could have been far higher.  This was an offering many of the local domestic banks which tend to be inter-country regional in their focus could not compete with.

Focusing on the migrant and ex-pat markets could have produced a far more successful result. However in Germany in particular the focus was firmly on the local German and certainly not on the migrant market.

For instance Turkey, one of the countries that Citibank consumer banking is pulling out of, has one of the most vibrant and innovative banking sectors with a young, educated, increasingly affluent population. It also has a large number of  its citizens living in Germany and the UK, many of which are sending money back to Turkey on a regular business. Many of the Turkish living in their adopted countries are successful businessmen ideal targets for the wealth offerings that Citibank is a very strong in. Targeting those Turkish in Germany could have been a very successful model for Citibank, particularly with the receiving bank being Citi.

Equally there are a lot of Pakistanis living and working in the UK and the Middle East with very high levels of remittances going back to Pakistan. There a lot of wealthy Pakistani entrepreneurs investing in a range of industries including real estate and leisure,. Many Pakistanis are well educated and mobile. Again this is a country that Citibank is withdrawing from.

This missed opprtunity is not limited to Europe. In Latin America many Spanish people live and work and with the increasing financial crisis in Spain, whereas it used to be that Latin Americans working in Spain  were sending money back to their home countries the flow of remittances is now going the opposite way from ex-pats back to Spain.

The failure of Citibank to gain market share in consumer banking across the globe is not because these markets are unattractive or too competitive but  it is the failure of Citibank to recognise the value of its global brand, the strengths of its payments infrastructure and its failure to think globally and execute locally. It is an opportunity that others will step into reducing Citibank to a minor player in consumer banking.

Tuesday, 18 September 2012

The end of the Retail experiment in Retail Banking?






With the announcement that Joe Garner, CEO of HSBC's UK retail bank and First Direct, will leave the bank early next year, following in the footsteps of Deanne Oppenheimer (Barclays), Andy Hornby (HBoS) and Helen Weir (Lloyds Banking Group)  the era of  former retailers running UK banks appears to have come to end.

The recognition that Retail Banking had lessons to learn from the retail industry was really born with the launch in 2000 of the 'Occasio' branches by Washington Mutual under Deanne Oppenheimer's leadership. These were completely novel bank branches with the screens between the tellers and the customers removed, bright open spaces which looked much more like a retail outlet than a branch. They even included areas with toys for children to play with while the parent took out a mortgage or a loan.

This concept of moving from 'branches' to 'stores' took off across the world. Abbey National (now part of Santander) openend up branches co-located with Costa Coffee outlets The thinking being that when a customer popped in for their cappuccino they might just take out a loan or open a savings account.

This model was taken even further in one bank in Puerto Rico where bank tellers were expected to take their turn operating as a barista in their branches handing out bank-branded coffees.

In Australia this concept took a uniquely Australian twist with one bank offering to wax your surf board while you did your banking.

Behind all of these radical changes to the design of  bank branches was the core retailing philosophy of the importance of footfall i.e. increasing the number of customers in the branch. The thinking behind this was that if there were more customers in a branch then this would increase sales, which is certainly true in retail.

However whilst having a coffee shop in a book store may have sold more books, with the Abbey National Costa branches it would appear that it was the sale of coffee that went up more than that of financial products.

One of the retail concepts that Joe Garner has brought to HSBC is the January Sale. For the last few years at HSBC branches loans have been offered at special deals and branches have had signs in the windows advertising the January sale. Again this is all about increasing footfall to increase product sales. In retail the usual reason for the January sales is to make room for new stock by selling off old stock at a discounted price rather than having to write off the value of the stock. That concept does not exist in retail banking. There are no old mortgages or old personal loans that are sitting around in the banks taking up branch space. Equally while in retail the January sales can result in impulse buys a loan or a mortgage is not and, never should be, an impluse purchase.

Meanwhile in The Netherlands the idea of making financial services products more physical was taken up. With one Dutch bank when a customer took out a loan they would leave the branch with a smart looking box. Quite what was in the box and what the customer would do with this 'physical' loan is still a mystery. Needless to say this experiment was quietly dropped.

Another concept that has been introduced into HSBC branches is HSBC Radio. Again this is a concept brought in from retail. Fashion shops such as Top Shop have for some time had their own radio stations both to improve and extend the shopping experience as well as increasing basket size. However the reality is that retail banking customers do not want to spend any longer than they possibly can in a branch. While they are queuing to pay in cheques running adverts for loans and mortgages is no more likely to create an impluse purchase than the January sales.

A concept brought from the white goods retail sector of heavily discounting the cost of appliances such as televisions, fridges and washing machines and then making up for the discount by selling highly profitable extended warranties was brought to the retail banking sector at the height of the credit boom in the form of low interest personal loans, credit cards and mortgages along with PPI (Payment Protection Insurance). In many cases the interest rate of personal loans was below cost (due to the high wholesale loan interest rates driven up by the excess demand over supply) making it essential for the banks to sell PPI in order to make a profit.

Finally introducing the retail compensation model of low basic salaries with commission based on sales targets including large incentives to beat targets into the retail banking sector has been key to the misselling of products to customers.

There is no doubt that the way branches looked and operated needed to change. Certainly a lot of the branches today are far more attractive and appealing places than they were before the injection of retail experienced executives into the banks.

However it would appear that the retail experiment is largely over. When Chase took over Washington Mutual  it took a conscious decision to refit the Occasio stores and make them look more like traditional branches.Underpinning Chase's decision was the reality of who the users of branches are today. With the exponential increase in the use of smart phones and other ways of connecting with the internet the vast majority of personal customers do not visit branches on a regular basis. Most personal customers will not either remortgage or take out a new mortgage more than once very three years (and increasingly longer than that), therefore their need to visit a branch (and even here increasingly mortgages are taken out online) is almost never. The users of branches today tend to be small businesses and private banking customers. The open style of branches with the bank private radio playing does not work for either of those segments of customers. Those customers want, and need, a difference experience.

The last 10-15 years has seen the injection of retailing ideas into retail banking. It has had some benefits for customers, but also has had some serious downsides. What we are now seeing is a recognition that banking has always been about servicing, and focusing on the total customer experience across all possible points of contacts is the most important way to retain customers and build loyalty. It is also clear that there are industries other than retailing that excel at delivering a great customer experience that banking should learn the lessons from.

Friday, 8 June 2012

M&S to take on high street banks



UK retailer Marks & Spencer is to launch M&S Bank, rolling out 50 branches over the next two years. A 50:50 joint venture with HSBC with current (checking) accounts to be launched in the Autumn and mortgages 'later'. This gives M&S a head start on Tesco who has had to delay the launch of its current accounts until 2013. Ironically these two 'new' retail-based banks are frequently adjacent neighbours on retail parks across the UK, where the big four high street banks are rarely to be found, so it maybe that they find themselves competing with each other rather than taking on the big boys.

Of course neither Tesco or M&S are really new entrants into Financial Services both have been offering products for some time. M&S first started offering FS products in 1985 and has the successful &more credit card, but this will be the first time it is calling itself a bank.

The timing of M&S's announcement is good. Not only does it come after a set of disappointing results for its retail business, it comes at a time when the high street banks are both unpopular and mistrusted. This can only be good for M&S with it's slightly older, more affluent and loyal customer base.

With the opening hours of the branches being the same as the retail stores and the initial prototypes of the branches looking very retail, calm and sophisticated and, as they are keen to point out, with fresh flowers, this will, to coin their phrase, not be any bank it will be a Marks & Spencer Bank.

But will it really shake up competition in the banking sector? Fifty branches over two years is not that many. Given that Virgin already has 75 branches (since its acquisition of the 'good' Northern Rock), Yorkshire Building Society has 227, Handelsbanken (the least well known, but the bank with the highest customer satisfaction) has over 100 branches and whoever (Co-op, NBNK or a flotation) acquires the Verde branches, that Lloyds Banking Group has to dispose of, will have 632 branches, just like Metro Bank with its 12 branches, this is not going to be an immediate threat to the high street banks.

Certainly in the short term it will not make a significant difference to the M&S share price. However it has every chance of being a success that will build over time. M&S has decided not to take the route that Tesco is finding to be so challenging of going it alone without a bank behind it. M&S by partnering with HSBC is able to stick to what it does best - retailing while HSBC can focus on managing the banking operations. The CEO of M&S Bank, Colin Kersley, was with HSBC for 30 years, so he knows the bank extremely well. The UK CEO of HSBC is Joe Garner, who spent his early career with Dixons. The two organisations have worked together for a number of years (HSBC acquired M&S Money) and understand where each is coming from, so this has to be a significant advantage.

Overall from a consumer perspective this move by M&S is to be welcomed. Whilst Joe Garner is quoted as saying that this is 'the most significant innovation that HSBC has carried out since First Direct' only time will tell whether he is right.

Friday, 18 May 2012

RBS forced to go down under for Retail Banking chief



RBS has announced that its new head of Retail Banking will be Ross McEwan. Despite the Scottish name, which undoubtedly is helpful at RBSG, Mr McEwan is from down under. He replaces Australian Brian Hartzer who is returning to his homeland to take up a similar role at Westpac (see http://www.itsafinancialworld.net/2011/11/wanted-ceo-for-uk-retail-bank.html ). It is not only native Australians that are making the journey down under, but there has been a flood of banking executives working in the UK who have decided to up sticks and move to the Southern Hemisphere (see http://www.itsafinancialworld.net/2012/01/trickle-becomes-flood-as-bankers-leave.html ).

Whilst a number of UK banking executives were approached and interviewed for the role that Ross McEwan will fill none of them were interested. This has to raise the question why? Certainly for executives with successful careers at banks free of government shareholdings such as HSBC and Santander there are clear reasons why a move to RBSG may hold little appeal. Given the turgid time Stephen Hester has had with his compensation and personal life discussed very publicly in the press and in Parliament to the point where even he considered resigning, why would anyone put themselves into that position when they don't need to? With the level of government implicit and explicit interference in the running of RBSG, there have to be better places to work. For the ambitious executive who sees heading Retail Banking at RBS as a career stepping stone the question is what would be the move after that? Almost certainly not into the CEO role of one of the UK banks as RBSG is a damaged brand and there are no obvious CEO roles coming up at the UK banks in the next few years. The probability is, as evidenced by Brian Hartzer, that the next move after heading up Retail Banking at RBSG would most likely be a CEO role in Australia. Not all UK banking executives or their families would see that as attractive.

With the Vickers ICB (Independent Commission on Banking)  recommendations coming into law including the ring-fencing of retail banking, the increased scutiny of bankers' compensation and the antagonistic attitude of British politicians towards bankers, the UK Government has made a career in UK banking very unattractive. For the state-backed banks, RBSG and Lloyds Banking Group, this has been made even more unattractive which means that these organisations are finding it even more difficult to attract top talent. The time it has taken for Lloyds Banking Group to find a replacement for Truett Tate, the head of Wholesale Banking is just one example of this.

Yet it needs to be recognised that to turn around these banks top talent is needed because these are some of the toughest challenges.

RBSG and Lloyds Banking Group are not alone in struggling to hire and retain top talent, it appears that having recruited Rumi Contractor from HSBC to become the UK Retail  and Business Banking COO in January that they have already parted company.

With HSBC CEO Stuart Gulliver suggesting that, with the increased cost of conducting retail banking, that pulling out of the UK is a real possibility, resulting in significant layoffs, reducing the number of  quality UK banking executives dramatically, there is a serious threat to the sector.

For the UK to retain its position as one of the key the Financial Services centres of the world, the sector needs to be able to attract the right talent. This is critical to the recovery of the UK economy. Isn't it about time that the politicians took the lead and put an end to the relentless bashing of the banks?