Showing posts with label Lloyds Bank. Show all posts
Showing posts with label Lloyds Bank. Show all posts

Friday, 29 May 2015

Why banks should see ring fencing as an opportunity

Banks in the UK should be seeing ring-fencing as an opportunity rather than trying to wriggle out of or diluting the effects of the legislation.

Ring-fencing, the separation of the retail business from the non-retail business is estimated to cost each of the major banks between £1.5 and £2.5bn to set up and a subsequent additional annual charge of between £1.7bn and £4.4bn to run. Each of the UK banks are looking differently at what will be inside the ring fence and what will be outside. For instance Lloyds Banking Group, which is largely UK and retail banking focused, is looking to have most of the existing group within the ring fence and only the corporate bank outside of it. On the other hand Barclays is looking to put the minimum, the UK retail bank inside, while businesses like Barclaycard and the corporate and investment bank would be kept outside the ring fence. HSBC appears to be looking at a similar model to Barclays with the UK Retail Bank – effectively HSBC, First Direct and M&S Bank inside the ring fence with the rest outside with the distinct possibility that the Head Office of the Group would be relocated to Hong Kong.

However the UK based banks are seeing ring-fencing very much as an unavoidable problem that is both unnecessary and expensive.

There is a different, more positive point of view and that is the ring-fencing activity should be seen as an opportunity to fundamentally re-think both how the bank should operate and make those major investments that it has never been quite the right time to implement. Ring-fencing should be seen as a means of investing in the business in order to both reduce the cost base and enable the bank to better compete in the UK market.

Implementing a culture that results in market leadership

Since 2008 there has been a lot spoken and written about changing the culture of banking, moving from the Gordon Gecko ‘Greed is good’ investment banking culture  and back to one where the role of bankers is to serve their customers. The recent Libor and Forex fines handed out by regulators suggests there is little evidence of the change in culture being anything other than talk.

With the physical separation of retail from investment banking there is a one off opportunity to actually design and implement the different cultural model that each of these businesses should adopt. The reality is that there is no one culture that fits retail, corporate, private and investment banking. As Treacy and Wiersema wrote in their seminal work on the Value Disciplines it is not possible for organisations to be the leaders in more than one of the three values disciplines – operations effectiveness, customer intimacy and product leadership. Excelling at each one of those value disciplines requires a different cultural model. The current size and complexity of banks has led to a blended culture that has inevitably led to compromise and resulted in excellence at none of them. Ring-fencing provides the opportunity to put this right.

Use the opportunity to replace legacy IT with architecture driven solutions

Much has been written about the failure of the large banks to step up to the challenge from the digital natives due to the complex legacy IT systems. Ring-fencing provides the opportunity to step back, produce and implement the architecture required to deliver the front to back digital experience that customers, both retail and corporate, are demanding. Under the label of ring-fencing this is the opportunity to ditch the legacy systems that were designed for a simpler banking world and that have been twisted and forced to support a multi-segmented banking business. This is the right time to replace them with architecturally driven, agile, cloud-based, channel agnostic solutions that will enable the banks to deliver the experience and services that customers are demanding rather than the ones that the banks are forcing customers to take. The experience that a retail customer is demanding is quite different from the corporate or investment banking customer requires. After all if the banks are going to have to spend between £1.5bn and £2.5bn why not spend this on something better than today rather than just splitting and duplicating today’s systems across those businesses within and outside the ring fence?  

A chance to significantly drive down cost while improving customer experience

Today’s banks have a real challenge with costs. With the additional capital required to be held, the low interest rates and the increased regulation there is no doubt that the cost base for banks need to be dramatically reduced and changed. Ring-fencing provides the opportunity to look at whatthe cost bases of the businesses inside and outside the ring fence should be. This includes looking at which parts of the cost base the bank actually needs to own and which it can outsource to those better able to deliver the service on a more cost effective basis. Outsourcing can not only reduce the costs it can also allow the bank to focus its key resources on the strategic priorities such as digital.  Ring-fencing provides the opportunity to look at the processes from the beginning to the end and to decide which parts of the processes the bank actually needs to own, which parts of the process would be suitable for the application of Robotic Process Automation and which parts of the processes are no longer relevant. This should enable the bank to significantly improve the overall customer experience as well as drive down cost. This is also a chance to strongly embrace the use of analytics and deploy Next Best Action tools. By executing all of these activities cost can, without doubt, be significantly reduced while exponentially improving the customer experience. This means that not only should the additional cost of operating the bank in a post ring-fencing world be reduced significantly from the estimated £1.7-4.4bn annual charge but the banks that get this right will be far better positioned for whatever the world chooses to throw at them.

Ring-fencing is an opportunity to be welcomed

For banks that see the glass half full (rather than half empty) when it comes to ring-fencing who embrace the opportunity to fundamentally re-architect and re-launch their businesses they will emerge from ring-fencing far stronger, far more agile and far more profitable than those banks who resent the regulation and try to do the minimum to comply with it.

Thursday, 30 April 2015

Can Yorkshire Bank and Clydesdale Bank become challengers?

The latest results from TSB have demonstrated that it is possible for a bank spawned from a global retail bank to be a challenger in the market. With National Australia keen to get rid of its northern hemisphere business, Nab UK consisting of the Clydesdale and Yorkshire brands, could this business be the base upon which a challenger bank is built?

A history of innovation

There have been several attempts to make Clydesdale/Yorkshire challenger brands particularly under the leadership of former Woolwich Building Society executives John Stewart and Lynne Peacock. After all they were the first people to introduce the concept of speed dating for SME customers whereby customers could meet other customers in the bank’s business centres with a view to starting a new business to business relationship.

Before that in the first internet boom it was Clydesdale Bank that launched Kiboodle a b2b portal for customers to buy and sell products using an online catalogue.

Lynne Peacock also tried to invigorate the bank and take on the Big 4 banks in the SME sector by opening up new banking centres particularly in London and the South East. That may be where there is the most money but it is also where there is the most banking competition. Looser lending criteria in order to build market share has been a major contributor to the current problems that Nab’s UK business has with major writedowns on loans made at that time.

What would it take to become a challenger?

So if National Australia has failed to make its UK operations a significant challenger to the now Big 5 banks (HSBC, Barclays, Lloyds Banking Group, RBS, Santander) what would it take to change that?

What Yorkshire Bank and Clydesdale Bank require to become significant challengers to the major banks would be significant investments in digital and core banking to deliver both the sort of customer experience offer the propositions that will attract customers of the Big 5 Banks to switch to them. The banks need to become significantly more efficient and that can only be brought about by investing heavily in automation.

Clydesdale Group is expected to be floated, or preferably sold, in either in 2015 or 2016. What will any purchaser of equity or the business actually be getting?

What do Yorkshire Bank and Clydesdale Bank bring?

Yorkshire Bank and Clydesdale Bank are very strong brands with a high level of customer loyalty. According to Yorkshiremen Yorkshire is God’s country and anything from Yorkshire is better than from anywhere else. That loyalty by Yorkshiremen to the bank extends way beyond Yorkshire. Maximising the value of that brand and the pride in Yorkshire could be key to future success.

The Clydesdale brand is equally strong in Scotland and particularly after the nationalisation of both RBS and Halifax Bank of Scotland (through being acquired by Lloyds Banking Group). Should another referendum on the independence of Scotland result in a ‘Yes’ vote then Clydesdale Bank could become the only bank headquartered in Scotland which could attract a lot more Scottish customers post independence.

Between them Clydesdale and Yorkshire operate 298 retail branches, 42 business and private banking centres mainly in Scotland and the north of England as well as having online operations.  That is comparable to the 316 branches that the still to be launched Williams and Glyn Bank (to be spun out of RBS) will have.

Clydesdale bank is the official issuer of Scottish banknotes and 50% of the currency in circulation in Scotland has been issued by the bank and has the brand on them. No other bank in the UK has their customers reminded of them every time they spend money. Clydesdale is also the first bank in the UK to issue plastic bank notes.

With loan balances in excess of £27bn, deposit balances of £23bn the two banks are comparable  in size and efficiency with Virgin Money.

Who might be interested in acquiring Yorkshire and Clydesdale?

Prior to the offer to buy TSB by Sabadell it had been rumoured that TSB might have been interested in acquiring the business. However one of the stumbling blocks was that there was a significant overlap in branches in Scotland and that would significantly reduce the value to TSB of the businesses.

Theoretically bringing Nationwide Building Society and Yorkshire and Clydesdale banks together should be an ideal arrangement.  It would significantly boost Nationwide’s presence in the north and Scotland. In return Yorkshire and Clydesdale could replace their legacy systems with Nationwide’s new, state of the art, SAP core banking system and significant investments in digital. Nationwide has significant experience of integrating businesses (Anglia Building Society and the Portman Building Society among others) and driving down the Yorkshire and Clydesdale’s efficiency ratio from an eye-watering 70% to much closer to Nationwide’s own 50%. However one of the downsides of being a mutual is that it is far more difficult to raise capital and therefore as sweet as this deal might be it is unlikely to be feasible.

A merger of Nab UK and Virgin Money would not make sense given the significant overlap of their branch locations even though the combination would build a challenger with sufficient critical mass of customers and assets to start impacting the Big 5 banks. Neither Virgin Money nor Nab UK have a suitable banking platform to build a challenger bank on so there  would need to be a very significant investment required to get the efficiencies and customer experience to the level required to challenge the big banks. Virgin Money has a similar cost:income ratio to Yorkshire and Clydesdale. The level of investment required and the payback period are likely to put off the existing investors in Virgin Money.

An argument could be made for Santander to acquire the business as it would significantly boost their presence in Scotland and the North and it has the technology platform in Partenon that it could migrate Nab UK onto, having already done this for Abbey National, Bradford & Bingley and Alliance & Leicester. However Santander likes to be a distress purchaser and never likes to pay over the odds. In addition two of the core assets of Nab UK the Yorkshire and Clydesdale brands would not be of value to Santander and the subsequent re-branding to Santander could lead to a significant loss of customers loyal to the Yorkshire and Clydesdale brands. All of this makes it unlikely that Santander will want to acquire the business at a price that Nab is prepared to accept.

A question then would be whether a foreign investor could be interested in acquiring the businesses off Nab. Given that Abbey was acquired by Santander, TSB will most likely be acquired by Sabadell then the large global Spanish bank BBVA could be a contender. With its focus on being both a bank and a software business and its recent acquisition of Simple, the US digital bank, then it would be surprising if they didn’t consider this as their opportunity to get into the UK retail banking market.

These are all questions that the incoming CEO for the Nab UK business, former AIB CEO David Duffy, will have to address as he prepares the business for IPO and potential disposal.

 

 

Thursday, 19 March 2015

Why TSB/Sabadell is no Abbey National/Santander



When news of the Sabadell, the Catalan bank, bid for TSB broke it was inevitable that parallels with the 2004 acquisition of Abbey National by Santander would be drawn. After all both banks are Spanish, have global footprints despite having started out as regional banks and are run by family dynasties.

However the two situations and players are quite different.

Sabadell is no Santander

Abbey National having made the transition from building society (savings & loans/community bank) to listed bank, at the time of the acquisition was struggling to decide what its role in the banking market was to be. With its launch of co-branded branches/coffee shops with Costa Coffee and its partnership with Safeway, the supermarket, it was not clear to its customers what it was. Santander came along to change all that.

Through its close relationship with RBS, including non-executive director roles, Santander had been observing the UK retail banking market for some time and understood the opportunities that were there.

Banking platform was key to Santander business case

The case that Santander made for Abbey National was that as leading global retail bank with a strong track record in successfully managing integrations and a world class technology platform that had been at the core of all their acquisitions, Santander could significantly reduce the costs of running Abbey National by replacing Abbey’s multiple banking systems with Santander’s Partenon banking platform, implementing Santander’s  best practice retail banking processes and Santander’s formidable disciplined approach to cost management.

It is interesting to note that despite Santander's assertion that the Partenon platform would be able to work for the UK market it took far longer and was more expensive to implement than originally envisaged.
Santander is quite unique in that as part of its journey from a small regional bank to one of the world’s largest banks IT has been at the heart of everything that they do and they even have their own IT company, Produban. Santander has set out not only to be a world class bank but also a world class IT company.

The situations for both TSB and Sabadell are quite different from that of Abbey and Santander.

TSB is no Abbey National

TSB has a very clear idea of the role that it wants to play in the UK retail banking market. It has strong leadership. As a result of the EU forced separation from its majority shareholder, Lloyds Banking Group, TSB is sitting with an infrastructure and balance sheet too big for the customer base and products that it currently serves. It is also using a legacy set of IT systems that Lloyds Banking Group runs for it. TSB has two main requirements that it needs to fulfil. Firstly it needs a significant increase in its customer base particularly in terms of lending to be able to make a profit. Secondly it needs a modern, agile IT platform that will both be able to deliver the fantastic customer experience that is so core to its strategy and at a significantly reduced cost than it is charged by Lloyds Banking Group today.

Sabadell due to its lack of a presence in the UK market will not directly bring the increase in the customer base or the additional lending, that a UK merger could bring TSB. Sabadell does not have its own IT company neither does it have a track record of building a modern banking system to manage businesses in multiple countries.

Digital excellence

What it does bring is excellence in the application of digital. Under the leadership of Pol Navarro, Head of Digital Transformation at Sabadell the bank has been a pioneer in digital banking and has demonstrated how banks can embrace digital. This is certainly something that TSB would want to exploit.

In addition Sabadell would bring to TSB deep experience in business banking something that inevitably TSB will need to offer to both meet it customer needs but also its shareholders’ profitability requirements.

£450m IT sweetener

Should Sabadell complete on the acquisition of TSB then Lloyds Banking Group will pay it £450m to assist it in getting TSB off the legacy Lloyds platforms. Should Sabadell get this then it should use this as a significant down payment to replace its group wide banking platforms, starting with the UK with a new platform architected for the digital age - agile enough to be able to quickly adapt to the inevitable and continuous changes in the financial services industry.

A Sabadell/TSB tie up would be good for Lloyds Banking Group (and UK tax payers since they are still shareholders), however the case for the deal going ahead is nowhere as easy to make as it was for the acquisition of Abbey National.

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.

Thursday, 30 October 2014

Why shared branches could be the answer to avoiding closing the last branch in town

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The announcement by Lloyds Banking Group that it would stop honouring the promise to not close the last branch in a town at the end of 2015 caused some furore amongst politicians and those representing rural communities. Lloyds having the largest number of branches of the major banks in the UK and partially owned by the tax payer has in many cases been left as the last branch in town as competitors have closed their branches knowing that Lloyds were obligated not to close theirs.

The response by Vince Cable, the UK Business Secretary, to the Lloyds announcement was to give all the major banks yet another rap across the knuckles in a sternly worded letter stating that this was unacceptable. However unacceptable it is what is the answer? While the banks may point to the many transaction services that the Post Office offers on behalf of the banks, a better answer is for the banks to get together and have shared branches for those villages and towns where they cannot justify the costs of having a single dedicated branded branch.

This joint branch would allow customers to perform transactions with their bank either with the help of a teller or by using self-service machines. If there is a teller then they would need to be trained in using each of the banks’ technology for the transactions covered by the branch. The simplest implementation would be for the branch to have one teller device for each brand sharing the branch and similarly for self-service machines, however this would have the disadvantage of requiring a larger branch than each of the individual branches will have required. The smarter option would be to have single devices which allowed the customer to say which brand they wanted to deal with when they first signed in and then the appropriate screens for that bank to appear. This would keep the size of the branch down.

The shared branch could include one or more meeting rooms where customers could meet with advisors from the appropriate bank by making an appointment in advance, allowing the opportunity for the advisor to service multiple branches and therefore maximising their productivity. The advisor would not even necessarily have to be physically in the branch but could converse with the customer via videoconferencing. This way a branch could remain open in low populated areas at a relatively low cost to each individual bank.

This service could even be provided by a third party or the local community under a different overarching brand.

This is not a new idea and is one that was first floated (by me amongst others) at least ten years ago. However that was at a time when the banks were making larger profits, there was less regulatory pressure and the technology to easily and cost effectively deliver these types of solution was neither mature nor available. While there was some initial interest from the major banks it was the idea of collaboration amongst the banks that was unthinkable even though it provided a benefit to the customer.

Maybe as the big 5 banks look to reduce their number of branches and rebuild their reputations this could be the right time to look to shared branches as a means of not being seen as the bank who closed the last branch in town.

Friday, 3 October 2014

The FCA is wrong to focus on account portability

The news that the FCA is to explore the move to full account portability as part of a review of current/checking account switching is disappointing as the FCA appears to be rushing to a solution without having really understood why customers are not switching their account providers at the levels that politicians and consumer lobbyists would like to see. The reason that these parties wish to see higher levels of switching is that they see this as an indicator of competition in the current account market which is dominated by the big five banks – Lloyds, Barclays, RBS, HSBC and Santander.

Customer switching has gone up by only 19% since 7 day switching was introduced

The FCA have been triggered into action by their disappointment at the low increase in the level of switching following the introduction of seven business day current account switching service introduced in October 2013. Despite the investment of $750m by the large banks in creating this guaranteed switching service levels of customer switching has gone up by only 19%.

The large banks have been the beneficiaries of switching

The irony is that the biggest beneficiaries of the account switching services have been Halifax (part of Lloyds Banking Group), Santander (one of the world’s largest banks), Nationwide Building Society and TSB (a Lloyds clone and still partially owned by the bank). With the exception of Nationwide, the account switching service has done little to change the market share of the major banks and even Nationwide has hardly changed the percentage.

The parallels between mobile phone numbers and account numbers are not valid

However for the FCA to jump to the conclusion that this is down to customers being reluctant to change their bank account number and therefore account portability will change this is both bizarre and illogical. Parallels are often made with the mobile phone industry where phone number portability has encouraged customers to switch between providers. However the use of phone numbers and bank account numbers are quite different. Whereas in order for telephone customers to be able to keep in contact with the hundreds and even thousands of people who have their number programmed into their phones keeping their mobile number when changing suppliers is essential the same cannot be said for bank account numbers.

Most bank customers have not memorised their bank account numbers. Once access to internet and mobile banking is set up a customer very rarely needs to know that number. When paying bills, transferring money, checking their balances, setting up or changing direct debits or standing orders there is no need for customers to know their bank account number. With the seven day switching services direct debits are transferred and guaranteed that if a problem occurs that the customer will be refunded for any charges occurred during the transfer process. With the increasing availability of P2P (Person to Person) mobile banking applications such as Pingit customers only need to know the mobile phone number of the person that they are transferring the money to (which is very likely to be stored in their phone) and don’t need to know the bank account details of the person that they are wanting to transfer money to. It is a fallacy to say that the reason people are not changing their bank accounts is because they don’t want to change their bank account number.

Customer interest in switching accounts is far lower than politicians and lobbyists

One of the primary reasons that is quoted despite the Seven Day Switching Service making it far easier for customers to switch current accounts is what politicians refer to as ‘customer apathy or inertia’. The reason that customers aren’t bothered is because for most customers banking really isn’t that interesting (until it goes wrong or they have a financial crisis), that the actual amount that they would save by switching from one bank to another is so minimal that it isn’t worth the effort and that they see one bank account much the same as another. To most customers banking services are a commodity and a largely undifferentiated one. They have better things to do with their lives than monitor whether one bank account is better than another.

There are significant numbers of providers of current accounts

The fact that the main beneficiaries of account switching have been the larger players is not because there is not a lot of choice in the market. Examples of organisations offering personal bank accounts include Nationwide Building Society, Tesco Bank, Marks & Spencer Bank, Metro Bank, Co-op Bank, Yorkshire Bank, Clydesdale Bank, Bank of Ireland (via the Post Office) and Handelsbanken.

The reason that Halifax, Santander, Nationwide, TSB and Metro Bank (though on a lot lower scale than the other four) have been successful in getting current account customers to switch to them is because of their attractive propositions whether it be paying interest on current account balances, discounts on utilities and other bills, convenience of branches or even offering dog biscuits. The fact that some of the most attractive propositions have come from the larger banks is because for most banks most personal current accounts are either loss leaders or have very low margins and therefore to be profitable in the current account market you need scale. That is very difficult and takes a lot of time to build from scratch as Metro Bank is finding.

Many of the so-called challenger banks e.g. Aldermore, Shawbrook, OneSavings Bank and Handelsbanken are not even attempting to engage in the personal current account market because of how unattractive it is financially. They would rather focus on the mortgage market or SME banking where the margins are higher and the cost to enter the market are far lower. As Virgin Money comes to the market it is based on the profits from mortgages and credit cards that the value will be attributed not current accounts.

The FCA is not focusing on the real issue

If the FCA is really interested in seeing greater competition in the current account market then rather than investigating a solution to a problem that doesn’t exist (customer only don’t switch because they don’t want to change their bank account number) then they should look at how to make it more attractive for the existing sub Big Five and new players to engage in the market with customer friendly banking propositions. It is only when there is significant differentiation between bank accounts in customers’ minds that switching volumes will become significant.

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, 12 June 2014

Tesco Bank launches a current account - finally!

The news that Tesco Bank has finally launched its current/checking account six years after its split from RBS was announce must come as a great relief to Benny Higgins, CEO, and the rest of the team at Tesco Bank. Like expectant fathers they have been pacing the corridors of the maternity ward far longer than they would have liked. The delays have been numerous but principally down to getting over the regulatory hurdles and, more recently, ensuring that the IT systems fully work the way that they are meant to before being unleashed on real customers. Delaying the launch of the current account until the systems were thoroughly tested, while it was frustrating for those anxious to see Tesco Bank becoming a real challenger to the sector, should be recognised as absolutely the right decision for the CEO to take. The embarrassment and reputational damage caused to banks such as RBS and National Australia from having serious outages in their core banking systems far outweighs the benefits of launching earlier.

The announced current account is paying 3% on balances and only charging a monthly account fee of £5 if less than £750 is paid into the account. This is a competitive offer. There are added advantages for Tesco customers who will also receive loyalty Clubcard Points on all spending using the Tesco debit card.

Marks & Spencer beat Tesco out with a current account, having both free and fee-charging versions of their accounts. As with Tesco there will be benefits of being both a customer of M&S and its bank in terms of rewards. There will be some overlap between customers but the big difference is that Marks & Spencer Bank is owned by HSBC and therefore cannot really be seen as a challenger bank.

The launch of the current account by Tesco Bank should represent a real challenge to the big five banks (Barclays, Lloyds, HSBC, RBS and Santander). As an aside, Santander likes to position itself as a challenger but being owned by one of the largest banking groups in the world, coming from the consolidation of building societies (Abbey National, Alliance & Leicester, Bradford & Bingley being the main ones) and with a less than perfect reputation for the service it provides it quite rightly deserves to be clumped in with the other big 4 banks as being just another legacy bank.

There are many reasons why Tesco Bank should be seen as a real challenge to the established players. For starters it is not a small bank – it already has over 6 million customers using its insurance and lending products. All of these customers are potential customers for their current account offering. It also already has a large physical distribution network through its supermarkets. As they are available to savers today customers will be able to make deposits in 300 stores. However this account has been designed to be opened online and customer support will be available on the phone. The bank being designed for digital differentiates it from the likes of TSB, Metro Bank, Virgin Money and Williams & Glyn, which have all come from a traditional branch centric design.

Not only has Tesco Bank been designed from the start with digital in mind, Tesco also has many years experience of running large scale digital operations through its own website as well as operations like Tesco Mobile. This gives it a much better chance of delivering a reliable good customer experience than other challenger banks, particularly the small scale contenders such as Metro Bank, Aldermore and Atom.

Tesco Bank also has the added advantage that through its Clubcard programme it not only has vast amounts of data on both its existing and potential customers but it also has years and years of experience of using that data to drive business. Unlike the new start ups and the established banks so-called ‘Big’ data is not a new topic for Tesco. This should give it significant advantages given its customer insight in terms of providing customised propositions to its customers.

Tesco Bank is also not weighed down by legacy. They don’t have the reputational problems from the mis-selling of PPI and the high levels of complaints which the Big Five banks have. They can position themselves as truly a new entrant. While TSB and Williams & Glyn may have the liability for the past retained by their parents (Lloyds and RSB respectively) many of the executives who made the decisions to sell PPI, set the aggressive targets and the staff who delivered them are working for these ‘challenger’ banks.

They are also not weighed down by legacy systems unlike the Big Five banks, those spawned from the Big Five (TSB and Williams & Glyn) and those challenger banks who have been created by the acquisition of former building societies such as One Savings Bank (Kent Reliance Building Society) and Virgin Money (Northern Rock). While it may have taken Tesco Bank longer to get to market with their current account it is being delivered on (at least relatively) modern systems.

What the launch of Tesco Bank’s current account means is that there are now two sizeable challenger banks that are not tainted with the legacy of the financial crisis and that are serving their customers using modern technology platforms designed to work in the digital mobile world – Nationwide and Tesco.

Does this mean that the Big Five banks are quaking in their boots worried about their future? Clearly any bank executive should be aware of and taking into account what the competition is doing. The reality though is that for most customers banking is not that interesting, it is a commodity not worth spending a lot of time thinking about and that despite Seven Day Switching making it easier, they have better things to do with their time than switch bank accounts. This means that there will not be a flood of customers leaving the Big Five banks to sign up with Tesco or Nationwide.

The launch of the Tesco Bank current account is to be welcomed as a new force in the retail banking market, but no one should think that this is going to bring about a seismic change to who customers bank with.

Wednesday, 28 May 2014

New NAB CEO faces challenge of what to do with Yorkshire and Clydesdale Banks


With Cameron Clyne leaving National Australia to spend more time with his family, incoming Group CEO, Andrew Thorburn, will have to face the perennial question of what to do with the bank’s UK businesses. For many years Yorkshire Bank and Clydesdale Bank have been seen as albatrosses hanging around the neck of the incumbent Group CEO of National Australia. With Nab’s focus on growing in their domestic market and Asia the two banks have long been seen as non-strategic.

During the financial crisis Nab had to invest nearly £1.5bn of capital into the business to shore up the balance sheet. There have been challenges with non performing loans as well as redress for misselling of PPI to add to the woes. As part of a plan to improve the performance of the business there has been a significant cost cutting exercise that resulted in the removal of 1,400 jobs and the closure of 29 banking centres. There has also been a withdrawal from London and the south of England.
However for many years both banks have been starved of any significant investment to improve them and to make them better able to compete in the UK market. It is not since the Brit John Stewart was Group CEO and fellow Brit Lynne Peacock was running the UK operations that any significant effort was put into innovation and growing the businesses in the UK. Indeed large parts of the strategy for the UK banks set out by Stewart and Peacock were reversed during the cost cutting exercise. (Recent news that Clydesdale Bank is to issue Britain’s first plastic £5 note hardly counts as innovation).
Nab in Melbourne have for a long time been very open about the fact that Yorkshire Bank and Clydesdale Bank are seen as non-strategic. The market has been sounded out for interest in acquiring the business. At one point it was rumoured that Santander was interested in acquiring the business but no deal has emerged. A key on-going challenge for the Nab Group CEO has been that there has been a significant gap between the value that the UK operations are held on the balance sheet and the price potential acquirers are prepared to pay. This situation has deteriorated even further since the crisis in 2008 with both bank valuations dropping and the interest in acquiring banks disappearing. For Nab, either no  Group CEO wanted to take that write off on their watch or the Board wouldn’t let him.
There is no doubt that there has been and continues to be a lot of dissatisfaction from analysts and investors about the financial performance of Nab in its local domestic market. It is seen as the laggard of the Four Pillars. The challenge for Andrew Thorburn is to turn around that perception. Whilst the UK operations are definitely not the highest priority in terms of fixing the business they are seen both as a distraction and requiring significant capital that could be better deployed elsewhere.
So as Andrew Thorburn starts his role as CEO in August 2014, will he do something to resolve this issue and what are his options for the UK operations?
The ideal outcome for the new CEO would be to sell the UK operations and minimise the write off. The question though is who would want to buy them?
On paper Yorkshire Bank and Clydesdale Bank could be challenger banks. They both have strong brands with loyal customers. The Yorkshire brand stretches way beyond the county boundaries. Clydesdale is seen very much as a Scottish bank and one that has managed to maintain its reputation far better than either Royal Bank of Scotland or HBoS, its two main rivals. This could make it attractive to Private Equity firms, for instance JC Flowers might wish to merge it with its OneSavings Bank. It could also be attractive to other Private Equity firms looking to establish a foothold in the UK retail banking market. However the timing for One Savings Bank is not good as they have already announced that they are to float and that is where their focus in the short term will be.
The challenge for anyone evaluating Yorkshire and Clydesdale is, apart from their customer base, what is there of value to acquire? Between the Yorkshire and Clydesdale they have 322 branches, a very similar number to the branches that Williams & Glyn (the challenger bank being created from the forced disposal RBS has to make) will have. However, as is becoming increasingly apparent to both established and challenger banks, the use of branches by customers is declining and therefore the value of having an extensive network of branches is reducing. As both RBS and Lloyds found out finding buyers for their branches was not easy with both, respectively, Santander and Co-op withdrawing their offers after long protracted negotiations. The additional challenge with the Yorkshire and Clydesdale branches is that significant investment by the buyer would be required to bring the branches up to  a standard customers expect today due to the lack of investment by Nab over the last few years.
If a new entrant was looking to acquire the Nab UK operations and they wanted to initially use the Nab IT platforms then if they wish to be competitive they would need to invest very heavily over the medium term on new platforms, as the Nab platforms are old and in need of retiring.
With a cost income ratio of 76% there is a lot of efficiency gains to be driven out by the right owner, but the question is the level of investment to achieve this and over what time period.
Given the level of investment that any new entrant would need to make in order to use the UK operations as a platform for competing in the UK retail banking market, the price that they would be prepared to offer is highly unlikely to meet the amount sitting on the Nab balance sheet.
Given Nab’s situation it is easy to understand why a couple of years ago Santander were rumoured to be interested in acquiring the UK operations. Santander has its own platform, Partnenon, and has a track record of being able to migrate bank accounts onto its systems – Abbey National, Alliance & Leicester and Bradford & Bingley. The challenge for Nab is that Santander is a distress purchaser and never knowingly overpays.
If Nab can’t sell Yorkshire and Clydesdale at an acceptable price then what about a flotation? Timing is a real challenge here as there has never been a time when more banks are coming onto the market. TSB, Aldermore, OneSavings Bank,William & Glyn, Virgin Money, Metro and Shawbrook have all announced intentions to come to the market over the next eighteen months. Investors are spoilt for choice. Along with the recent disappointing flotations (Saga, JustEat. AO, etc), albeit in other sectors, there will be a downward pressure on prices and consequently the amount of capital that will be raised.
Another option is to do nothing and let the two brands continue to operate as they are today, continue to reduce costs and improve performance with minimal investment and allow the business to slowly decline as customers move away to competitors when they are attracted by better offers.
There is no immediate need for Andrew Thorburn to make a decision about the future of the UK operations particularly given the uncertainty with the Scottish Referendum occurring in September 2014. The UK operations operate under a Scottish banking licence and a ‘Yes’ vote could create a long period of uncertainty and have a significant impact on the value of the UK operations.
However as a new CEO there is a grace period during which there is an opportunity as the new broom to look with fresh eyes at all the problems. It is an opportunity to announce write offs, set the bar and expectations low and then over-perform. Thorburn should take full advantage of this initial period of goodwill to be quite clear what his plan is for Yorkshire and Clydesdale to end the uncertainty for customers, colleagues and investors.

Thursday, 24 April 2014

The challenges facing the next RBS CIO

With the news that Mike Errington, CIO of RBSG, is retiring the bank will be looking for a replacement. The new CIO will have an overflowing inbox, so for those considering taking on the role what are some of the challenges that he or she will have to face?

The immediate on-going work is to ensure the stability of the existing systems. Having had a number of serious, customer-impacting outages over the last few years (including a problem with Ulster Bank ATMs on the day this was written), the work of applying patches to and building resilience into both hardware and software needs to continue. RBS is not the only bank that in earlier times avoided doing maintenance as a way of saving costs and subsequently is feeling the impact of doing that in terms of reliability of systems.

The second tactical exercise is the simplification of the IT infrastructure. However this is far easier said than done as the IT systems have evolved over many decades, creating great complexity and the number of people who understand the older systems and how they interrelate is rapidly declining both as the result of retirement and cost cutting within the bank. Simplification is about retiring and rationalising systems and infrastructure. Given the complexity that exists this is alike disarming a booby-trapped Second World War bomb requiring both high levels of skills and nerves of steel.

Both of these steps are akin to re-arranging the deckchairs on the Titanic, given the ages of the systems. There is no doubt that there has been significant underinvestment in IT since way before the RBS/Natwest integration. Whoever is the new CIO they should use the opportunity of as part of their taking the role to negotiate a commitment to a wholesale replacement of the core retail banking system as the likes of CBA (Commonwealth Bank of Australia), Nationwide Building Society and Deutsche Bank have carried out. However this would involve spending measured in the low to mid billions of pounds and a programme taking 3-5 years to execute. This is where making such an essential change becomes particularly difficult specifically for RBS as RBS is not just any bank, it is a state-owned bank. Such is the political pressure to see the bank returned profitably to the private sector and within the first couple of years of the next government i.e. almost certainly by the end of 2018, that it is highly unlikely that the funding for such a major investment programme will get approval from the key shareholder. However that is what both the CIO and the CEO should be looking for if RBS is to once again become a truly competitive UK bank.

There are however other major transformation programmes that the new CIO will have to pick up, drive and deliver.

Having negotiated an extension of the deadline to the end of 2016 for the disposal of the 308 branches that RBS was forced by the EU to sell as a result of receiving state aid, creating a separate clone of the RBS systems for the new Williams & Glyn’s bank to run on is another top priority for the new CIO. This is not dissimilar to the exercise that Lloyds Banking Group had to perform to create the platform for TSB to run on. However the Lloyds Banking Group platforms were in a far better state than the RBS systems benefitting from coming on the back of creating a single set of systems for the Lloyds TSB/HBoS merger. Even having that advantage for Lloyds Banking Group creating the separate TSB platform was not simple or easy with the eventual cost being in the order of £2bn. Delivering the William and Glyn’s separation to the 2016 deadline will be a major achievement.

This is not the only separation programme that the CIO will have to oversee. The IPO of the Citizens business in the US in Q4 2014 and the complete disposal by the end of 2016 will also need to be executed. This will entail the disengaging of Citizens from the Group systems.

In addition there is the question of what to do with Ulster Bank. The preferred option is to dispose of it by selling it to one of the challenger Irish banks e.g. Permanent TSB, Danske Bank. If that is to go ahead then the new CIO will have to look at the separation of Ulster Bank from the Group systems and supporting the clone until it is integrated into the buyers' systems.

One of the core strategies of RBSG is to scale back the investment bank, reducing costs to be aligned with the smaller bank and to return the bank to be more focused on the UK and supporting UK businesses. This will inevitably require changes to the investment banking platforms as businesses are closed or sold off. To achieve the reduction in costs and the required flexibility as volume drops will almost inevitably mean looking at further outsourcing of platforms and operations to third parties.

On top of the RBSG specific initiatives the new CIO will also face the plethora of transformation programmes and projects that will need to be implemented as a result of regulatory changes. One of the core ones will be the implementation of ring-fencing once that is fully defined. This will mean a significant change in the governance of RBSG and there is a question as to whether the role of Group CIO can persist under the new rules, requiring in a significant restructuring of Group Operations.

All of this will need to be delivered whilst digital, mobile and the use of data analytics for both competitive advantage and risk management continue to move at pace in an increasingly competitive banking market.

The new RBS CIO will need to face up to this hugely challenging environment all within the constraints of  a bank operating very much in the public spotlight, with the need to rebuild trust and the financial constraints imposed by  having the government as the largest shareholder. Only the bravest should apply.