Showing posts with label Handelsbanken. Show all posts
Showing posts with label Handelsbanken. Show all posts

Friday, 5 August 2016

Digital Transformation in Banking is not happening

There is a lot of talk about digital transformation by banks but the reality is that despite what they say they are not doing it. What the vast majority of banks are actually doing is digital enablement. They are simply using digital technologies to do what they are doing today only slightly better. There is nothing transformational about what they are doing.
Fundamentally the products and the services that banks are offering are no different than those they have been offering for the last fifty years, if not longer. They may be offered through different channels like the mobile, tablet and over webchat but they are still fundamentally the same as those offered to your parents when they were your age.
It is not only the big banks that are guilty of digital enablement but also the majority of the so-called challenger banks. For most of them the term ‘challenger’ is not even appropriate. What is challenging about providing free dog biscuits in branches! Their impact on the market share of the big banks is negligible and not growing at a sufficient rate to be a significant threat anywhere in the short term.
The reality is that the majority of the challenger banks are simply competitors offering a subset of the products and services that the big banks provide. However the emergence of a large number of competitors into the market is to be welcomed as the choice for individuals and small businesses as to where they get their bank services from has, and continues, to expand.
When you take the UK market as an example the competitors break down into a number of categories:
Existing Competitors
These are the likes of Co-op Bank, Nationwide Building Society, Clydesdale and Yorkshire banks who have been around for many years with a fairly consistent market share. They are all in different ways and at different speeds enabling their businesses with digital technology. Some are being more ambitious about growing market share of current accounts than others.
The Clones
These banks are the ones that have been spawned from previously existing organisations, been re-sprayed with a new or revived brand and trade on the fact that they are not one of the big four banks. The main players in this category are Santander (Abbey National), Virgin Money (Northern Rock), TSB (Lloyds Banking Group) and Halifax (Lloyds Banking Group). Of course the latter is still owned by one of the big four, but is positioned as their ‘challenger’ brand.
The Clones offerings differ from each other. Santander has expanded the range of products that Abbey National offered with a push into current accounts and SME banking. While the Santander 123 account has shown some innovation it is still fundamentally a vanilla current account. Virgin Money has expanded the Northern Rock offering into balance transfer credit cards, but despite previous announcements is holding back from entering either the current account or SME banking markets for the moment.
None of the clones are leading in their application of digital technologies and, at best, are enabling some of their processes with digital.
The New Traditionals
Into this group fall the likes of Metro Bank, Shawbrook, Aldermore, Oaknorth, Handelsbanken and OneSavings Bank. New banks that are offering an alternative to the Big 4 banks but all of which have a small market share and whilst growing quickly will take years on their current trajectory to be of serious concern to the large banks. Like The Clones they position themselves as not being one of the big four and differentiate themselves on offering superior, personalised service. They have not invested heavily in digital - Metro Bank has only just (August 2016) launched its customer website. In the cases of Metro Bank, Handelsbanken and Aldermore have made their branches and face-to-face service a key point of their differentiation.
The Mobile banks
These are the banks that are being designed with mobile in mind for the Millennials the likes of Mondo, Atom, Tandem, Starling and Monese. While a number of these have been granted their banking licences and a number are in beta testing these banks have not really been launched yet. We have some indication of how they will operate however until they move to full launch it is difficult to judge how transformational in terms of their digital offering they will be.
So if today’s banks are only undertaking digital enablement what is it that they would need to do to be undertaking digital transformation?
Re-imagining the business models for banking
Transformation is about fundamental change – something that the banking industry has not seen since the Medicis created the first bank. This is about changing the business models for banking to reflect what customers want and also how the way industries boundaries are blurring.
Banks that are truly undertaking digital transformation are reimagining the business models for banking
Customers do not want to do business with banks. Customers do not fundamentally want a mortgage they want a home. Customers do not want a loan they want a car. Banks for customers are a means to an end. Banks who get this are recognising that they need to be offering services beyond the banking product. For example some banks are forming agreements with online estate agents so that when a customer is looking at a property online the banks knows this and can tell the customer whether they can afford it and whether the bank is prepared in principle to offer them a mortgage.
Banks have lots of SME customers many who will have offers that are of interest to other SMEs or individuals. The banks know how well those SME businesses are performing so banks are in an ideal position to create a SME marketplace where their customers can do business with other bank customers knowing that the supplier is backed by the bank. Equally the supplier will know that the customer is backed by the bank. In this model the bank operates as the introducer adding value to both the business and the customer.
For those banks that have invested in building a modern banking IT infrastructure they recognise that this is a highly valuable asset and there are opportunities to offer banking as a service to either businesses outside the banking industry such as retailers who want to offer banking services to their customers or to banks in other countries. Two good examples of organisations that already do this, both German, are SolarisBank https://www.solarisbank.de/ and Wirecard www.wirecard.com
The three examples of different business models above are just illustrative of what banks and other organisations are doing to use digital as an enabler to fundamentally change the banking industry.
This is true digital transformation and for those organisations that embrace it the future is positive and full of hope; for those who don’t the future is a slow decline into obscurity.

Wednesday, 21 January 2015

Why 2015 won't be the year of the challenger bank


When politicians and consumer finance champions talk about challenger banks they are looking for new players to eat into the 77% of the current account market and the 85% of the small business banking market that the Big 5 (Barclays, Lloyds, HSBC, RBS and Santander) currently have.

The figures from the Financial Conduct Authority for potential new banks could give the impression that 2015 could be the year that finally the Big 5 sees their market share being significantly reduced:

6 banking licences issued
4 banks proceeding through the application process
26 new banks being discussed

In addition there are already the likes of Nationwide, Co-op, TSB, Yorkshire Bank, Clydesdale Bank, Metro Bank, One Savings Bank, Handelsbanken, Aldermore, M&S Bank, Tesco Bank, Virgin Money and Shawbrook operating in the UK.

However on closer scrutiny the picture isn't quite as rosy and is unlikely to cause any executive from the Big 5 banks to lose any sleep.

The existing “challengers” broadly fall into one of four camps.

Camp 1: Existing established Players:

Nationwide

Co-op

Yorkshire Bank

Clydesdale Bank

Post Office (Bank of Ireland)

The established players have been operating current accounts in the UK market for many years, Nationwide being the newest of these to this specific market. Despite having been in the market for some time these established players’ impact on the market share of the Big 5 has been minimal. Nationwide is the most proactive in trying to acquire new customers within this group as is reflected by their being one of the biggest beneficiaries since the introduction of 7 Day Switching. Their market share is small but growing and its offering is something that clearly appeals to customers who do not like the Big 5 banks.

Camp 2: Banks created from former banks:

One Savings Bank (Kent Reliance Building Society)

TSB (Lloyds Banking Group)

Virgin Money (Northern Rock)

Williams & Glyn (RBS) – still to be launched

These are all banks that have (or will) relaunch themselves and have existing customers, branches and IT infrastructure. What this means is that in terms of offering a true alternative to the Big 5 banks they are limited by the legacy technology and cost bases they have inherited when they were set up. In the case of TSB and Williams & Glyn both of these were compulsory disposals by their parent banks following the 2008 financial crisis, however both of them have significant shareholdings by Lloyds Bank Group (TSB) and RBS (Williams & Glyn) so whether they can really be seen as challengers when they are still owned by one of the Big 5 is questionable.

One Savings Bank does not offer a current account and is focused on the specialty lending sector. Virgin Money does not currently market a current account.

Camp 3: Banks owned by larger organisations

Handelsbanken

Tesco Bank

M&S Bank

These three are each quite different.

Handelsbanken which has more than 175 branches in the UK has its parent company in Sweden. It is primarily focused on SME banking but does offer a personal current account. It is building a presence and has very high customer satisfaction but is still sufficiently subscale to not be a threat to the market share of the Big 5. However it is picking off customers that the Big 5 banks would rather not lose.

Tesco Bank has only relatively recently launched its current account so it is difficult to judge how successful it will be. With the size of the Tesco customer base and the insight it has into its customers from the Clubcard it has the potential to be a serious challenger however achieving sufficient scale will be beyond 2015. There is also a possibility with the woes of Tesco that the bank could be a candidate for disposal which could change significantly Tesco Bank’s market position.

M&S Bank while it does offer current accounts cannot be seen as a challenger as it is owned by HSBC, one of the Big 5 Banks. 

Camp 4: Greenfield challenger banks

Metro Bank

Aldermore

Shawcross

Atom Bank

Charter Savings Bank

Hampden & Co

These (and there are more) are the genuine upstarts the ones that are doing or planning to do something different in the market. The last three are still to launch. They are all primarily Private Equity funded.

Of those listed on Metro Bank offers a personal current account and Atom has a stated intention to offer one.

What each of these Greenfield challengers does not offer is scale and will certainly not bother the Big 5 banks in 2015.

Big 5 bank executives can sleep easy in 2015
When an examination is made across the four Camps as described above the inevitable conclusion is that while there may be some headlines and excitement about the number of potential challengers in and coming into the UK banking market there can be no doubt that in 2015 there will be very little dent in the current account market share of the Big 5 banks.

Wednesday, 6 August 2014

Creating competition in retail banking

With the recommendation by the UK CMA (Competition and Markets Authority) to conduct a review of competitiveness in the current account banking market, what are some of the areas that they may consider to increase competitiveness?

Breaking up the banks. This is the Labour party’s big idea - creating a set of competitor banks by splitting the big banks. The primary focus for this would be the Royal Bank of Scotland and Lloyds Banking Group. However this isn’t a new idea and is already being tested with the creation of TSB from Lloyds Banking Group and Williams & Glyn’s from RBS. However already there are lessons to be learnt from this process.

While there was initial interest from a number of players the list of serious bidders rapidly shortened when the complexity, the capital required and the price being sought became clear. The initial two successful bidders the Co-op (Lloyds) and Santander (RBS) after lengthy negotiations and detailed planning withdrew their bids.

Separating the bank’s technology whether cloning (TSB) or migrating to a new platform is proving to be enormously complex and very expensive.

The payback period is very long and without the subsidy and support of the selling bank would be even longer. TSB for instance does not expect to break even for many years and that is despite being helped by Lloyds lending the new bank a book of loans.

While breaking up the banks will mean that there are more places to have a current account there is no guarantee that this will ensure better deals for customers, particularly given that the easiest option for the broken up banks is to be clones of the original banks just simply without the scale advantages. With little to differentiate them having more players in the market doesn’t result in real consumer benefit.

Creating a payments utility separate from the big banks. One of the often heard complaints from new entrants is that the big banks have an advantage because they own the payments infrastructure and the cost for new entrants to use that infrastructure is a barrier to entry. One option would be to create a separate payments utility not owned by the banks. However that does not mean that it will necessarily be cheaper for new entrants. For a start there is the cost of acquiring and separating the infrastructure from that of the banks that currently own it which would need to be paid by customers of the utility. There is also the question of how to charge for the use of this utility. The charge would need to reflect the significant cost of running, maintaining and investing in modernising the infrastructure – it is not simply the cost of using the infrastructure because otherwise what is the incentive for whoever ends up owning the infrastructure to invest in it to make it not only continually available but also suitable for new innovations as they come along? Commercial reality dictates that for banks with high transaction volumes that cost per transaction should be lower.

Portable bank account numbers. Many of the challenger banks are supportive of the concept of portable bank account numbers. They look at the mobile phone industry and see the way that customers can take their phone numbers with them. However before recommending this change the CMA needs to research just how big an inhibitor to switching bank accounts for customers is the change of account number. Given the Seven Day Switching Service where the banks guarantee no interruption to direct debits and standing orders and given the limited numbers of times customers actually have to know their account number in order to transact, would portable bank account numbers really open the floodgates of customers switching bank account numbers?

Ending ‘free when in credit’ banking. In the UK customers have got used to so-called ‘free banking’ where as long as a customer remains in credit, whilst they get little or nothing for the balance that they retain, they don’t pay charges. A number of the challenger banks have complained that this gives the incumbent banks an advantage as it is difficult (but not impossible) to compete on price and because it gives banks offering current accounts a distinct advantage over those who don’t in terms of the low cost of all those balances when it comes to lending. It will take a brave politician to move to compel the end of free banking. Of course to attain transparency then the cost of each transaction e.g. cost of an ATM withdrawal, the cost of paying in a cheque, the cost of a direct debit, etc, would need to be made clear to customers and, the challengers would argue, that that would enable customers to choose between banks. However looking at a market where this is the way banking is conducted, Australia, then not only is there a greater concentration of current accounts held with the Four Pillars (Nab, Westpac, CBA and ANZ) than with the equivalents in the UK, but Australian banks are amongst the most profitable retail banks in the world. Despite that there are not lots of new entrants fighting to get a slice of the pie. For customers Australia is also one of the most expensive countries to bank. It would appear that ending ‘free banking’ alone would not solve the perceived competition problem.

Set a maximum market share for current accounts. On paper this would appear to be the solution. The big banks could be given a period of time over which they must reduce their share of the market to for instance to no more than 15% of the market each leaving the challenger banks to fight over the remaining 40%. The banks would need to be told the mix of customers they must dispose of, just as Lloyds was instructed for the disposal of TSB. However what does this do for consumer choice? Not all customers were happy to be told that they were moving from Lloyds to TSB without an option. Given that the CMA investigation is about creating competition and making it easier for customers to switch banks this does not appear to be the solution.

Make it even easier for new challengers to enter the market. Measures have already been put in place to reduce the capital required, shorten the process and allow challenger banks time to grow into being a full scale bank. The benefits of this are already being seen with the likes of Atom Bank being announced. It is difficult to see what more could be done in this area.

Make retail banking more profitable to encourage more new entrants. There is little chance of this being one of the recommendations of the CMA. The reality is that with increased regulation, increased scrutiny and rising costs for compliance retail banking is becoming less and less attractive a sector for investors. As JC Flowers have recently remarked with Returns on Equity going from double to single digits there are more attractive sectors to look at investing in.

Is the CMA looking to solve a problem that customers don’t see as a priority? With the advent of Seven Day Switching the number of customers changing banks has risen – over one million customers have chosen to do that. The biggest beneficiaries have been TSB, Santander and Nationwide Building Society. There more than a handful of challenger banks out there – Tesco, Marks & Spencer, Metro Bank, Co-op Bank, Handelsbanken, Aldermore and others with current accounts on the way – amongst them Atom Bank and Virgin Money. Despite that the market share of the large high street banks hasn’t changed significantly. The question is why aren’t customers changing banks? Is it simply because they see banking as a utility, that each of the banks are pretty much the same, that for most customers (unlike bankers, politicians, financial journalists and consumer champions) banking doesn’t enter their consciousness unless they have a bad experience. In the grand scheme of things for most customers they have far more important issues to think about than whether they should switch their bank accounts.

Perhaps it is time that the CMA focused on something of more day to day importance to consumers.

Wednesday, 2 July 2014

Interest rate rise will be the litmus test for challenger banks

Banks don’t like periods of stable interest rates and the rates in the UK have been stable for a long time now. The reason that banks like to have the interest rates changing frequently is because each change is an opportunity to improve the net interest margin, to squeeze a bit more profit out of the customer.

With the Governor of the Bank of England, Mark Carney, indicating and then soft shoe shuffling away from the position that interest rates could go up as early as the end of 2014 savers shouldn’t get too excited as firstly the rise won’t be large and secondly banks usually don’t pass on the full amount to customers but keep a bit back for themselves. Bank business plans are built on the assumption that they won’t pass on the full benefits to the customer. With bank profitability squeezed by regulation and low interest rates this is why the banks are looking forward so much to greater interest rate volatility.

So the question is whether the challenger banks will back their branding of doing banking differently by not following the herd and instead passing on the full amount of the rate rise? After all it isn’t as if they are incurring additional costs (other than typing into the computer the new interest rate which is not exactly difficult) when the rate rises so there is no justification for taking a slice of the interest rate rise.

Most of the challenger banks find themselves in the position where they have more deposits, whether from savings accounts or from balances on current accounts, than they need. A sure fire way to lose money as a bank is to be paying out more to customers in interest than you are receiving back in interest and fees. This is why you won’t find the likes of TSB, Metro Bank, Aldermore or Handelsbanken appearing in the best buy tables for savings accounts. They want you to like them but they’d rather not attract too much of your money, particularly at a high cost.

TSB, the spin off from Lloyds Banking Group, is in the worst position. So bad is the situation for TSB that Lloyds has had to pad out TSB by lending it a book of loans to soak up some of the excess savings for the next few years. Not only that it also has an infrastructure (branches, back office and IT systems) which is larger than it needs for its existing customer base. It is like a new boy at school where its mother has bought it a uniform that is a few sizes too big to allow for growth. This means that for TSB passing on the full interest rate increase will only extend the loss making period of the bank, which it is unlikely shareholders will support.

Equally you won’t find the challenger banks topping the lending price tables. They want to lend you money but, given their cost of acquiring deposits they can’t in the long term price aggressively. This is where the incumbent banks have a significant advantage. Their cost of funding is far lower. Having large numbers of current accounts with large balances for which the majority of customers are paid no interest they can afford to lend at far lower rates than the challenger banks if they chose to. Instead of passing this advantage onto customers they choose to make a larger profit whilst still charging competitive prices to win new business.

When it comes to existing customers the challenger banks don’t appear to be backing their customer focused words with actions. A primary source of profits for banks are made from customers whose fixed rate or discount deals and have ended and have been moved onto the bank’s Standard Variable Rate. This is always higher than what a new customer could get. If the challenger banks really are focussed on long terms relationships with their customers and with providing good value for money then when the end of a fixed rate or discount period is coming up rather than just telling the customer that they are going to move onto the SVR (which the banks wouldn’t tell them if they weren’t obligated to) they would be offering them a new fixed rate or a new discounted rate. However most banks don’t do this because they want the additional profit they make from having customers on the higher interest rate. Instead they mark the customers as DND (Do Not Disturb), waiting until a customer threatens to move their mortgage before considering making them a better offer. Only at that point and only for certain customers do they then offer them a better deal to keep them. The message this sends to customers is that there is no reward for loyalty. Instead their loyalty is a means of subsidising the price of loans to new customers.

For challenger banks that have started from scratch, rather than from acquiring another business or a book of loans the jury is still out as to their attitude towards existing versus new customers. They have not yet been tested by a large volume of maturing customers and have not had the chance to demonstrate whether they really want to do banking differently from the incumbent banks.

However the challenger banks that have been spun off from another bank or have grown by acquiring mature mortgage or credit card books and have seen customers offers mature have had the chance to demonstrate that they are doing something different but have not taken it.

When the first base rate rise is announced customers will have the chance to judge the challenger banks by whether they pass on the full rise to savers. This will tell customers whether these challenger banks are really serious about taking on the legacy banks, genuinely have a different attitude towards treating their customers fairly, and are putting their money where their mouths are or whether it is all just marketing hype.

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.

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.

Sunday, 1 September 2013

Another blow to Government ambitions for SME lending as Nationwide postpones launch to 2016

The announcement that Nationwide Building Society is postponing its push into SME banking until 2016 is a blow for the UK coalition government, particularly coming on the back of disappointing SME lending figures this summer. The Nationwide suspension comes despite the new governor of the Bank of England, Mark Carney, announcing that the largest eight banks and building societies (which includes Nationwide) will be allowed to hold less capital once above the 7% level to encourage more lending to the SME segment.

This builds on the bad news earlier in the year for SME lending that Santander was withdrawing from the purchase of the RBSG branches. These branches have been selected specifically for their SME focus. The uncertainty as to who, if anyone, will replace Santander in taking on that business is a further blow. For while the Chancellor has talked about new entrants coming into the UK banking sector and Vince Cable, the Trade Secretary, has pushed for the banks to increase their lending to businesses and even talking about setting up a government funded bank for business, competition in lending to the SME sector has decreased rather than increased. The decision of the Co-op to stop any new lending to corporate sector has been effectively the withdrawal of another player in the market.

But should anyone feel surprised that this is the case? As one of his parting gifts the former Governor of the Bank of England, Lord King of Lothbury, pushed for banks to hold far higher levels of capital than they did prior to the financial crisis. The newly formed PRA then went on to enforce this. With the Nationwide, somewhat surprisingly given the risk averse nature of its book, being told to hold significantly more capital than it has been used to and with a growing residential and buy to let market, both of which require far less capital to be held than for SME banking and represent a far less risky way to make money, it is no real surprise to see that the Nationwide decided there were better places to use its capital at this time.

Of course this is not the whole picture. Nationwide has been for some time been going through the painful process of replacing its core banking platforms. Like Commonwealth Bank of Australia which has declared victory on its implementation of the same system two years late and with a budget that doubled to AUD1.2bn, Nationwide is finding carrying out a full heart, lungs and liver transplant of its systems is not plain sailing. It may well have been that Nationwide has not only delayed the entry into SME banking for financial reasons, but also because the new systems are not ready.

Whilst overall competition in SME banking is reduced there are one or two new entrants that are making their mark, albeit on a relatively small scale. The largest of these is Handelsbanken with in excess of 150 branches and a high level of customer satisfaction despite being very profitable. There is also Aldermore which, whilst keeping a low profile is making  notable progress.  The owners of Aldermore are members of one of the syndicates bidding for the RBSG 316 branches, so the Aldermore approach to banking may get the opportunity to scale up.

The Government may be satisfied that the UK has a safer banking environment but the price that is being paid for the additional regulation, the higher levels of capital and increased interference is that there is not only less competition in SME banking but less lending going to small businesses to fuel the growth of the economy.

Sunday, 11 August 2013

Who should buy the RBS branches?

On the face of it the Lloyds Banking Group's and the Royal Bank of Scotland Group's forced disposal of their branches look quite alike. Even the numbers of branches being disposed of, in a dyselexic way, are the same 631 and 316 respectively. Both were imposed by the European Union as a result of state intervention. to save the banks brought about by the 2008 financial crisis. Both Groups have struggled to find buyers for their branches. Both banks have had potential buyers walk away from their deal late in the day - the Co-op in the case of Lloyds Banking Group and Santander in the case of Royal Bank of Scotland Group. Both are now pursuing floatation of the severed entities due to a lack of interest from potential buyers.

However fundamentally the offerings for potential buyers are different and therefore the people and organisations that should seriously consider and be considered for the acquisitions are quite different.

The reason that Lloyds Banking Group have been instructed to sell 631 branches and their associated customers is because, following their arms being severely twisted by the Government to save HBoS by acquiring it, LBG was left with a very dominant market position in unsecured lending, mortgage and current accounts for consumers whilst being underpinned by government support.

For RBSG selling their 361 branches was both due to the level of government support that required to save them from their self-created problem and their overwhelming dominance of the SME market segment. Thus the customers that RBSG is selling are small and medium sized business customers.

Some might say that retail and SME banking are not that different. Indeed that debate has been running for decades with banks periodically changing where SME banking sits in their organisation between within the retail and within the corporate bank. Business Banking has not sat comfortably in either organisation being neither fish or fowl.

As is being evidenced by Santander in its results, Business Banking is nowhere near as straightforward as retail banking and requires significantly more capital for every loan. Santander who is one of the few banks that has been able to build a global retail banking platform (that has enabled to make numerous successful acquistions across the globe) has found it very challenging to bend their Partenon banking platform to support UK Business Banking customers needs. Indeed it was IT issues that were cited by Santander as the reason that the acquisition of the RBSG branches was halted.

The difference from retail banking extend way beyond just capital and technology and into the most important part of banking - the people who work in it and the skills and competencies they require. It is not impossible to move from retail banking to SME banking, but  it requires a different mindset and different skills.

Another difference between the LBG and the RBSG disposals is the condition of the IT systems. Lloyds Banking Group has, as a result of the acquisition of HBoS and the need to fundamentally reduce costs, been through an exercise of migration and simplification of banking systems. The starting point, the TSB systems, were newer and better designed than either Lloyds Bank, RBS or Natwest systems, so provided LBG with a far better starting position than RBSG finds itself in. The problems that RBSG has had with its banking platforms over the last few years are well documented and have been very obvious to their customers.

Whoever acquires or enters into a joint venture with RBSG needs to recognise that they will need to partner with RBSG IT for at least the next five years as it is very unlikely that moving onto a new platform and separating from the old one could be achieved any faster than that. This means that the acquirer's business will be dependent upon RBSG being able to provide IT services to keep their business going. This was clearly something that Santander found to be unpalatable.

This raises the question of who should acquire RBSG's branches? Given that the deals risks are already high (amount of capital, market risk, IT risk), then when RBSG considers who to partner with then a consideration has to be which of the potential buyers reduces the deal risk the most whilst still offering an attractive commerical proposition. One of the key ways to reduce the risk is to sell to a buyer who fundamentally understands and has a proven track record in SME banking.

Anacap who's bid is led by Alan Hughes the former First Direct (a retail bank) boss also owns Aldermore the UK banks that focuses solely on SME banking. Anacap has the experience of setting up a new SME bank, putting in new platforms and writing profitable business. This has to count for a lot.

The Standard Life bid (teamed with Corsair Capital and Centrebridge) is being led by John Maltby the former head of SME Banking (and Kensington Mortgages the buy-to-let specialist) at Lloyds Banking Group. This consortium also has the backing of the Church Commissioners, though whether this suggests any divine preference is doubtful.

Finally there is the consortium led by Andy Higginson the former Tesco Finance Director who has experience of working with RBSG when he was involved in the launch of Tesco Personal Finance.

Competition in the SME banking market has changed since 2008 when the EU decision to force RBSG to dispose of market share with the increasing presence of Santander, Aldermore and Handelsbanken, it is a very different market with different regulatory requirements.

So for whoever decides to buy the RBSG branches the latin expression could not be more appropriate - caveat emptor!

Friday, 7 June 2013

Will challenger banks make a real impact on UK lending?

Antony Jenkins, the CEO of Barclays, told investors that the challenger banks will fail to make a real impact on the lending market in the UK in the coming years.

His argument was that those who look to acquire the branches available by the forced sale of Lloyds Banking Group and Royal Bank of Scotland branches when customers are using branches less and less in favour of online banking are buying a wasting asset.

Simplistically this is right, however even in markets where customers are carrying out a greater proportion of their banking business online such as The Netherlands, where 50% of branches have been closed, when a customer has a complex financial problem that needs fixing those customers are still showing a strong preference to address these face to face in a branch.

Even in a digital world the branch is still an important part of the marketing and branding for all the world's major banks. Branches are perceived as a reassuring sign of the stability of the bank, that by having a physical presence the bank is not going to disappear overnight.

What Anthony Jenkins did not explore is how the role of the branch is and needs to evolve (something which Barclays as an organisation is very aware of). The challengers recognise that branches are generally under-utilised assets and are being far more creative about their role in the community whether it be for business meetings, book clubs, music soirees or simply somewhere to go for a coffee. Banks such as Oregon's Umpqua (www.umpquabank.com) and Virgin Money with their lounges (http://uk.virginmoney.com/virgin/about-lounges/) are taking forward the thinking on the future of the branch. Antony Jenkins is right that the big five banks are increasingly closing branches but the challengers with their far smaller branch footprint are opening new branches rather than closing them. Handlesbanken (www.handelsbanken.co.uk) have been quietly opening branches and have been having a not insignificant impact on the market particularly on business lending.

When Jenkins referred to the challengers he appeared to limit that to those who might acquire the Lloyds Banking Group and the Royal Bank of Scotland branches, but of course this is not where the only challenge to the lending market is going to come from. Tesco, M&S and Sainsbury's banks already have very large branch networks they just happen to be retail outlets. Betting against these three making a success of their banking business is the height of folly.

Where Jenkins is completely correct is that for a challenger to simply open branches, and specifically traditional branches, would not be a wise move given the evolution of the customer and the banking industry. However the main challengers are not doing that. They are looking at an omni-channel strategy where online, mobile, call centre and branches come together to provide a new and better customer experience. There is a recognition that even in the branch customers may want to access their mobile or online banking services, that digital opens up the range of services that a branch can perform.

Taken at face value Antony Jenkins' comments that challenger will have little real impact on the UK lending industry smacks of complacency which the challenger banks should be delighted to hear. However given Jenkins' experience and knowledge of retail banking the challengers should not underestimate the fight they have on their hands. This can only be good for customers.

Tuesday, 13 November 2012

For Sale: 316 bank branches must go by end of 2013



In June 2010 it was announced that Santander was to buy the branches. Having made the offer, £1.65bn, and completed the local searches (regulatory approval)  when the surveyor's reports came back Santander decided that the RBSG technology estate was in too bad a state (or at least that's the reason they gave) and rather than negotiating a large discount walked away from the deal.

This leaves RBSG in an awkward position. They have just over twelve months to sell or float the branches. Hardly the strongest negotiation position for a seller to be in.

What will any potential buyer get? 1.8m customers, £21.7bn of deposits and 316  branches (2 of the original 318 mysteriously seem to have disappeared - possibly they were in Brigadoon), 240,000 small business accounts and 1,200 corporate banking relationships. This is the equivalent of 5% of the business banking market.

Why would anyone want to buy this business?

SME account customers on average have higher levels of deposits, have higher levels of personal account activity and are more profitable than other customers. They are also more inclined to use branches and want face-to-face contact. Traditionallly this has been a hard sector for new entrants as the Big Four (Barclays , Lloyds Banking Group, RBS/Natwest and HSBC) have dominated the sector and persuading customers to switch (because they have complex relations with their bank) has been difficult. Building an SME banking business from the ground up by encouraging customers to switch from their existing bank is a long slow process as Santander is finding. Therefore for an organisation wishing to enter the market or an existing player wishing to significantly expand their market share this should be highly attractive.

With bank valuations at very low levels, the example of what Cooperative finally got Lloyds Banking Group to settle for and the fixed timescales by which RBSG must agree a deal, this should be a buyer's market and the ability to get the branches for a snip is there. Whilst in 2010 Santander agreed to pay £1.65bn the expectations are that now this deal will be made at around £650m.

Who are the potential buyers?

None of the remaining three of the Big Five banks, Lloyds Banking Group, HSBC or Barclays, even if they wanted to, will be allowed to bid for the business on the grounds of their current market share.

Whilst Virgin Money was in the original competition for the branches, having subsequently bought the 'good bank' elements of Northern Rock, and having expressed initial renewed interest when Santander walked away from the deal, Virgin have effectively rules themselves out. Sir Richard Branson has said that organic growth makes more sense for Virgin Money at this time. Having had to raise large amounts of capital to fund the Northern Rock acuisition it would be very difficult for Virgin to return to the markets and raise even more capital to acquire the RBSG assets. Given the complexity of the integration project for Northern Rock underway it is not all surprising that Virgin has politely withdrawn from the sales process.

Next most often mentioned is Nationwide Building Society. With a track record of growing by the successful acquisition and integration of building societies (Anglian, Portman, Chesire, Derbyshire, Dunfermline to name a few) and positioning itself as different from the banks - more customer friendly and not tarred with all the scandals associated with the Big Five, Nationwide would be welcomed by many as a challenger in the SME banking market. As a mutual going to the markets to raise the large amount of capital could be a significant challenge, but The Cooperative was able to overcome this to acquire the Verde branches from Lloyds Banking Group, not least of all by getting the price significantly reduced.  A factor that may put Nationwide off the deal is the 1,200 corporate banking relationships. This is not a sector that Nationwide currently plays in. Whereas SME banking is often linked quite closely to retail banking and can share a common banking platform, corporate banking is quite different not only in the technology but also in the skills required from the staff.

Nationwide does have the advantage over other potential purchasers that it has spent the last few years investing heavily in a modern core banking system (SAP) which should make migration of the acquisition onto the new platform easier than for Santander. However the new platform isn't finished or fully proven yet, so there would have to be a quite lengthy period where Nationwide would be dependent upon RBS's platform.

JC Flowers, the private equity firm, is also seen as a contender. Having created its One Savings Bank vehicle from the acquisition of Kent Reliance Building Society and having put aside a £1.5bn treasure chest to acquire mortgage books, this money could be re-directed towards the RBSG branches. However the One Savings Bank vehicle is a very small operation and would need to be reversed into the far larger RBSG assets. Neither One Savings Bank or RBSG have modern IT platforms to run the business on so there would need to be a significant investment to make the business a real contender. Going for the SME banking business as the first serious entry into the UK banking market would also raise the risk for JC Flowers. What could be interesting to see is whether JC Flowers could negotiate for a different mix of the branches and customers more towards personal customers and mortgages to make it more attractive to them.

AnaCap Financial Partners LLP, a private-equity backer of Aldermore Bank Plc is also rumoured to be interested. AnaCap has partnered with Blackstone, the world's largest Private Equity firm, to buy banking and insurance assets. Aldermore Bank does not have any branches but still has assets of around £2bn. AnaCap and Blackstone having access to the capital to make this deal happen, however the shape of the deal would potentially be to back an MBO or floatation and to acquire the RBS IT platforms to run it. The question would have to be, given the IT problems that RBSG has had recently, what level of further investment in IT would need to be made to create a true challenger in the SME  and corporate banking markets?

Another private equity firm that could be interested is Corsair Capital where Lord Davies, the former CEO of Standard Chartered, is a partner and vice-chairman. There is no doubt that his experience would bring credibility to a bid, just as Gary Hoffman's presence lent credibility to the NBNK bid for the Lloyds Banking Group Verde branches. This would be very important as getting Bank of England approval for  the executive team of whoever acquires the business is going to be absolutely critical to the success of any bid.

On paper these assets could be attractive to National Australia who with their Clydesdale and Yorkshire Banks do have a significant focus on the SME sector and where there could be synergies. However the UK is not strategic for NAB and there is significant pressure on Cameron Clyne, the CEO of NAB, to dispose of his UK assets even at the cost of a significant writedown. If he were allowed to or wanted to take a longer term view then acquiring the RBSG assets and combining them with Clydesdale and Yorkshire Banks with a view to then selling them could be a way of getting a better return.

Handelsbanken has been making very success in roads into the UK SME banking market with over 150 branches and both high profitability and customer satisfaction. Whilst the addition of  316 branches would significantly increase their scale their preferred approach is grow organically so it is highly unlikely that they will enter the sales process.

Looking at other foreign players who might want to enter the UK banking market the European banks have their hands full in their domestic markets and closing their operations in the troubled European economies such as Italy, Spain, Portugal and Greece, so it is highly unlikely that one of them will enter the fray.

A long shot could be one of the Russian banks such as B&N Bank, Sberbank or VTB. They have the capital and the interest in expanding beyond Russia, but this would have to be a long shot.

Looking at the timescales, the integration challenges and the potential buyers the most likely outcome is a flotation or a management buyout of some form. RBSG needs to go through this process whether it is the final outcome or not as it is important for any potential buyer to believe that there is a competitive bidding process in order to protect the price that RBSG and ultimately the UK tax payer gets for these assets. Whilst Stephen Hester,  the Chief Executive of RBSG, sees the disposal of these branches as a 'distraction' and representing only 2% of RBSG it should be an interesting twelve months.

Update February 3rd 2013: According to Britain's Sunday Telegraph an IPO is now increasingly likely as no one has made a serious offer for the branches. Potential bidders have no been helped by a significant rise in the value of banks in the last few weeks. Whilst it is now most likely that a float will be the outcome, don't assume that this is not an elaborate ploy to force the hand of a potential bidder.

.