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

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.

Saturday, 12 October 2013

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


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

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

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

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

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

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

Thursday, 5 May 2011

PPI - A sign of the mad, bad world

The announcement that Antonio Horta-Osorio, the new CEO of Lloyds Banking Group has decided to draw a line under the sorry PPI (Payment Protection Insurance) situation, take a reserve of £3.2bn and withdraw from the BBA (British Bankers' Association) appeal against the recent judgement should be welcomed as a sensible, pragmatic move and hopefully bring a close to the mad, bad world that was operating at the time that the misselling was taking place.

When the sale of PPI was at its peak the banks and finance houses were working in a market where personal loans were being sold at a loss as competition had driven the prices down and demand for funds driven the wholesale prices up. Banks and Finance Houses were prepared to sell these loans at a loss because they were able to sell Payment Protection Insurance at such a high premium, with very little chance of a claim against them due to the convoluted terms and conditions. Staff were heavily incentivised to sell PPI because that was where the profit came from and as a result hard-selling took place.

Consumers actually got loans at lower interest rates than they should have, so a good proportion of customers (primarily those who didn't take out PPI) were getting a good deal, so it wasn't all a terrible rip off for bank customers.

Hopefully the other banks and Finance Houses will follow the lead set by Lloyds Banking Group and draw this sorry episode to a halt. (UPDATE: All the other major banks have followed suit with RBSG writing off £850m, Santander £538m, Barclays £1bn and HSBC £270m or a total just under £6bn). That doesn't mean that everyone who claims should get their money back, because there are a surprisingly large number of claims being made by people who either didn't take out PPI or worse still didin't even take out a loan. The process of weeding out the fraudulent claims and processing the valid claims will undoubtedly take some time.

What should happen now is that loans and credit cards move to being priced realistically, based on the wholesale market prices and with a reasonable risk-adjusted price. This may be a shock to customers, but at least it will represent a fair price.

The fall out from the financial crisis is that retail banking needs to change, but the changes and expectations need to be not only on the banks' side but also the consumers.