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

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.

Friday, 7 March 2014

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

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

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both Metro Bank and Nationwide the lack of transactions fees when abroad attracted customers; however that feature was withdrawn and both now do charge fees for transactions abroad.

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

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

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

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

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

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

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

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

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

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.

Sunday, 15 September 2013

Why Seven Day Current Account switching will not turn up competition

The launch this week of the Current Account Switching Service whereby UK banks will have just seven working days to switch customer's current accounts to a rival has been heralded as a key enabler of competition in the UK retail banking. In particular the Chancellor sees it as a way of encourage new entrants to build up market share.

The banks have been forced to spend hundreds of millions of pounds to rapidly put in place a system that will enable this to happen, however the expectations set by the Chancellor are unlikely to be met.

For a start this assumes that there is pent up demand to switch bank accounts that is held back simply because the process of changing accounts is too complicated or too slow. The reality is that most customers are simply consumers of banking services and see banking as a commodity much like gas, electricity or water. Despite what the banks might want to believe most bank customers rarely or never think about their banks. Who provides their banking service simply isn't  that important to most customers as long as it works.

Not only that but most customers think all banks are alike. Why would they change from one bank to another, even if the new switching services makes it marginally easier than before. Just the effort of researching an alternative bank and initiating the process of changing is more effort than most customers think is worth for the benefit they will get.

With so called 'free banking' it is even more difficult for banks to differentiate themselves for the average customer. When there is no perceived charge for writing cheques, paying bills and taking money out of a cash machine, then how do the banks make a difference in the mind of customers?

The slow take up of the M&S Bank Account can be partly attributed to the requirement to pay monthly fees, particularly given that that the target customers probably do not  believe that they pay anything for their existing accounts.

So-called 'value-added' accounts, where for a monthly fee customers can receive a bundle of addtional services such a travel insurance, breakdown cover and airmiles, have had some moderate success, but research shows that either customers do not use the additional services or they could have bought them cheaper as individual items. They are also potentially the next product to be subject to a misselling investigation given the similarity with the incentives and targets to sell these offerings to customers as were there for  Payment Protection Insurance.

The Chancellor has suggested that if the seven day switching service does not create the flood of switching that he is expecting then account number portability may be imposed on the banks. Account number portability is seen as the equivalent of phone number portability, except it blatantly isn't. Where traditionally people have had to know each other's telephone numbers to contact each other (even for this with the advent of the smart phone the number is stored and not really 'known'), there is little need to know bank account numbers in order to use the banking system. A customer only shares their bank account number with a few people and very infrequently in comparison to their telephone number. The use of bank account 'aliases' avoids the customer ever needing to know their bank account number. Having to have a new bank account number is not the reason people don't switch banks.

Should the Chancellor decide to ignore the evidence and impose account number portability then this will make the several hundred million pounds spent by the banks on the switching services look like loose change. To architect a long term solution to industry wide account number portability (unlike the switching service which has been thrown together with little thought about architecture and long term durability and has created an expensive legacy solution to maintain) will require very significant changes to the underlying banking infrastructure and the cost will be measured in billions and will be borne not only by the existing players but also new entrants. See http://www.itsafinancialworld.net/2011/01/why-portable-bank-accounts-arent-going.html

Fortunately the head of the FCA (Financial Conduct Authority, one of the two bodies that has replaced the Financial Services Authority), Martin Wheatley,  at his reason appearance before the Treasury Select Committee has already made it clear that the CASS (Current Account Switching Scheme) should be allowed to run for at least a year to see whether it has had the desired effect before any further consideration or detailed studies of the costs of providing account portability should be started. This effectively kicks it into the long grass and to after the General Election, which will be a great relief to many bank CEOs.

The Chancellor has also suggested that making direct debits and standing orders be moved from one bank to another at no cost to the switching customer should also be imposed on the banks if switching doesn't create the movement that he is looking for. This idea seems reasonable and it is reasonable as that is what the banks do already today, but is not a material factor in encouraging customers to switch accounts.

The ease of movement of  customers is only one half of the argument that the Chancellor and consumer lobbyists make for the introduction of the switching service. The other reason is to encourage new entrants and competitors into the banking industry.

However the ease of attracting and on-boarding customers is not the reason for there being so few sizeable new entrants in the market. With the increasing regulation, the higher levels of capital that need to be held (even if it can be raised and afforded in the first place) and the reduction in the ability to make a fair profit from retail banking makes entering the UK retail banking market unattractive to new entrants. Even Vernon Hill, the entrepreneur and founder of Metro Bank, the first new entrant to the UK for many years, has said that if he knew then what he knows now about how difficult it would be to get a UK banking licence he wouldn't have started. One of the reason that Tesco Bank has been delayed in its full launch has been the time it has not only taken to get a banking licence but also the time it has taken to get its executive's FSA approved.

So now that seven day switching is introduced will the big banks be quaking in their boots trying to lock the branches to stop customers leaving, making amazing offers to make them stay? Will new entrants such as Tesco Bank, M&S Bank, Virgin Money and banks we have not even heard of yet be having to close offers because of the volume of customers trying to switch to them? The answer is almost certainly 'no' because seven day switching is not the answer to creating competition in the market and the time and money spent on it will prove to have been a poor investment.

Tuesday, 2 July 2013

Can TSB really be a challenger bank?

With the letters going out to effected existing Lloyds' customers and the announcement that from September 632 Lloyds Banking Group branches will be re-branded 'TSB' does this herald a new competitor in the UK banking market or it just a mini-me Lloyds Bank brand? This is a question that will not only be asked by those customers being migrated to the 'new' bank but also by existing Lloyds' customers, politicians, banking regulators and the European Union. Ultimately it was the European Union that has forced the launch of TSB as a consequence of the state intervention required after Lloyds TSB was compelled to buy HBoS.

From September TSB will have the same products, the same propositions, the same terms & conditions, the same computer systems (or at least a copy of them), the same staff  and the same executive team as they do now and have had for some time. The branches will be re-branded but the staff that work in them will be the staff that worked in the same Lloyds TSB branch, working to the same incentives.

In many respects for customers who have chosen to join Lloyds TSB and are being forced to switch to TSB this could be seen as positive as their new bank will be re-assuringly the same. However over time, if TSB is to become a challenger to the established banks then this will need to change.

One of the most important requirements for TSB to become a challenger is to have different ownership. Lloyds Banking Group has applied to the EU for a two year extension to the deadline to sell off the 632 branches. As this is written there has been no indication whether this has been granted. Whether this comes from an IPO (most likely) or from a single or syndicate of investors wishing to buy TSB time will tell. However Verde, as the project  to separate and sell the branches and supporting infrastructure was called, has been running for some years already and no one has come forward with a compelling and executable proposition to buy the business. (The Co-op's proposition proved to unviable and the NBNK proposal was rejected by Lloyds Banking Group as being insufficiently commercial, though whether that was a political decision is a moot point)

Whilst TSB is still fully owned by Lloyds Banking Group it will be no more of a true challenger to the Big 5 banks (Barclays, RBSG, Lloyds, HSBC and Santander) than its sister brand, Halifax.

Credit where credit is due Lloyds Banking Group knows how to run separate brands off the same systems and processes and has done it very successfully since the integration of Lloyds TSB and HBoS was successfully completed. Halifax is seen as an edgier, cost conscious brand than the more conservative Lloyds brand. The Halifax executive team have largely been kept in tact and have been able to retain much of the culture of the bank prior to takeover.The staff still identify with the brand they work for. Indeed to many customers Lloyds and Halifax are quite separate banks and there are customers who move to Halifax to get away from Lloyds and vice-versa. However ultimately both banks report into the same Lloyds Banking Executive, Alison Brittain and she reports to Lloyds Banking Group CEO, Antonio Horta-Osario. Both banks answer to the same shareholders principally the government.

It is a fallacy that there is no competition in UK banking, there are an increasing number of players out in the market offering retail banking services - Nationwide, Yorkshire Building Society, Yorkshire Bank, Clydesdale Bank, M&S Bank, Co-operative Bank, Tesco Bank, Sainsbury's Bank, Metro Bank, Virgin Money to name just a few. However it is true that the Big 5 still continue to have the dominant market share. With the introduction of easier switching in the Autumn the excuse that it is too difficult to change banks will be taken away. The fundamental reason that customers don't switch banks as much as politicians and regulators would like is that banking is to a large extent seen by customers as a commodity and really not that interesting. Banks are also seen as being as bad as each other so why customers can't be bothered changing when it really won't make a lot of difference.

For TSB to be a real challenger then it needs to be able to answer the question of what can it offer that will make those not compelled to become its customers to switch their banking business to TSB.
This has the potential to be a bigger hurdle for TSB than for some of the other players. The executive team of TSB are highly capable people, but they have worked for Lloyds Banking Group for a considerable period and a question is whether have been immersed in that culture and that way of doing business are they able to come up with a fresh way of delivering banking that will be attractive to their customers? If they are able to come up with a fresh proposition will they be able to actually deliver it given that they will be dependent upon Lloyds Banking Group and its legacy systems to deliver their proposition? Given their size in comparison to Lloyds Banking Group and the other Big 4 will they be able to invest enough, particularly in all things digital and mobile to be able to compete with the far larger budgets that the others have?

Is the reality that despite all the best intents and capabilities of the leadership of TSB that with the restrictions laid on them such as ownership, access to capital, size and dependency on Lloyds Banking Group that the best that can be expected from TSB is a slightly less good mini-me?

Only time will tell, but for the good of consumers and for the health of the retail banking industry in the UK it is has to be hoped that TSB will emerge as a strong challenger bank.

For official answers on how TSB will operate go to
<a href="http://www.tsb.co.uk/">www.tsb.co.uk/</a>

Monday, 22 April 2013

Are drive thru branches really relevant in the 21st century?

Metro Bank has announced that it will open in May the first drive thru branch in the UK this century. The branch will be alongside a dual carriageway in Slough the town that was the setting for Ricky Gervais' 'The Office'. It will consist of its own dual carriageway - one for ATM and automated deposit services and one for access to a teller for day-to-day transactions.

The UK does not have a history of drive thru bank branches with only three having been recorded - the first in 1959, the second in 1966 and finally one at Hatton Cross near Heathrow Airport in 1998. Given that there has been so little success with drive thru branches in the past the question has to be asked why not and what is different this time?

Most banks  are increasingly trying to drive transactions out of the branches rather than through them encouraging their customers to carry out routine transactions online either through internet or mobile banking. Along with this and the use of cash declining, this  move on Metro Bank's part seems counter intuitve. However Metro Bank was launched on the basis that it did not want to be like other banks.  Vernon Hill, the American founder of Metro Bank, is not someone to follow the herd. Hill grew Commerce Bank, the successful banking business in the US, based on his experience of running McDonald's franchises. He sold TD Bank before coming to the UK and based on that experience launched the first new bank in the UK.

Metro Bank has focussed on providing a different, louder, more US-styled experience for customers with features such as 'magic' coin-counting machines that look like Vegas slot machines, lollipops and free dog biscuits.

Metro Bank proudly does not compete on price but on the customer experience it provides. The launch of the drive thru bank is part of this differentiated experience. It comes ahead of the launch of seven business day switching that all UK banks will need to adhere to from October 2013 and in anticipation of increased competition from other new entrants such as Tesco, Marks & Spencer and Virgin Money.

Banks for many years now have actively attempted to re-purpose branches from transaction processing to retail outlets where the customer is encouraged to spend the time required to open more complex products such as current accounts and mortgages.

The Metro Bank drive thru branches will clearly be servicing not sales centres, however they will be paired with a more traditional branch where sales can be carried out.

However the more recent trend in retail banking is very much towards omni-channel where digital is integrated into the whole customer experience irrelevant of which channel is used. This is where the leading banks are investing. This includes bringing internet and mobile banking into the branches and through digital bringing the contact center operative and the banking advisor into the home or onto the smart phone or tablet.

Tesco another new entrant into full service banking is investing heavily into digital and omni-channel banking prior to its full launch. Metro Bank does have an online banking service but does not major on this or reflect that in their current seventeen branches.

It is unlikely that the launch of drive thru banking is going to be the breakthrough strategy for Metro Bank that takes them from being a small but attention-grabbing player to being a significant threat to the big 5 banks, but it will certainly get them some free publicity.

Thursday, 14 March 2013

How to make it easier to get new entrants into UK Banking

Let your customers through.

There are many complaints from politicians and consumer lobbyists that there is not enough competition in UK banking and in particular that there are not enough new entrants. Whilst seven business day switching will be introduced in September 2013 as discussed in http://www.itsafinancialworld.net/2013/02/why-faster-bank-switching-will-not-turn.html this alone is not enough.

There are five actions that need to be taken together to encourage new entrants into the market and allow them to compete. These are:
  1. Speed up the process of issuing banking licences
  2. Speed up the process of approving executives
  3. Reduce the  initial capital required
  4. Provide low cost access to the payments system
  5. Make current account switching easier
Looking at each of these in turn.

The process of applying for and being granted a banking licence is tortuous, time-consuming and very expensive with no guarantee of success. This alone is putting off banks, particularly where the new entrant is foreign. Without a banking licence new entrants are not able to take deposits a vital source of funding given the costs of wholesale funding. Vernon Hill, founder of  Metro Bank, the UK's most visible new entrant, has said  that if he knew then what he knows now about how difficult it would be to get a UK banking licence he wouldn't have started.

This is a major barrier to entry not only for consumer banking, but also corporate and commercial banking.

The process of approving executives by the FSA is typically taking nine to twelve months. This is not only effecting new entrants but also existing players. Even when an executive of one of the Big 5 banks changes role it is often necessary for them to be re-approved for their new role, which makes it difficult for banks to be agile in changing their organisations, which means that poor performing executives are left in place because it is too difficult to replace them. Whilst an executive is going through the approval process they are not allowed to perform their new role. If an executive was approved for a role in an existing bank they will need to be re-approved for the identical role in a new bank. For new entrants this can cause a significant delay in launching the new bank.

Currently when a new entrant wishes to launch a new bank they will need to present their 5 year plan and put aside  from day 1 the 9% capital that they will require when they achieve their 5 year plan. This clearly represents a significant cost to the new entrant and effectively means that the initial capital may represent not 9% but anywhere up to and over 100% of the assets that they will have by the end of the first year of  operating. Whilst the government has annouced that new entrants will in the future not have to put up the full 9% but rather 4.5% this does not go far enough. What is needed for new entrants is that the capital put aside is allowed to increase in line with the assets that they take on. Whilst the practicalities of doing this real time may be too difficult certainly doing it on a projected year by year with a true up at the end of each year would be a far more reasonable approach.

One of the recognised barriers to entry for new entrants is access to the payments infrastructure, both local and international. The cost of this is seen as prohibitive, but without it they will not be able to offer customers the essential ability to withdraw cash from ATMs, make direct debits and standing orders and international payments. The government has talked about making the payments infrastructure a national utility or forcing the Big 5 banks to offer new entrants low cost entry. This sounds eminently sensible, but it cannot and should not be at an incremental cost to the current volumes that go across the payments infrastructure. The reason for this, just like for traditional utilities such as gas, electricity and water, is that the companies that provide them have invested billions of pounds to build the high performing, resilient infrastructure and need to constantly upgrade and improve that infrastructure and those investments need to be paid for by the users of that infrastructure. So whilst the politicians may say that processing of an ATM transaction can be measured in pence and that that is the price the banks should be charging other banks, a  price based on a fair fully loaded cost, including future investment, needs to be calculated. One way to address this would be to get an independent assessment of the cost of providing and investing in maintaining and upgrading these services. This could a role that the proposed Payments Regulator could play.

Finally, as already mentioned, making current account switching is already in progress and is due to deliver in September 2013.

The combination of these changes, announcements on which have either already been made or will shortly be made, will significantly reduce the barriers to entry for new players into the UK Banking sector, but what are the implications of these changes, have they been thought through sufficiently and will they be enough to shake up competition in banking?

Speeding up the issuing of banking licences should purely be about the efficiency of the FSA and its successor. It should not be about dropping the quality of the testing. It is clearly dependent upon the quality of the submission and this falls at the feet of the applying new entrant.

Simillarly speeding up the approval of executives needs to be about efficiency and re-thinking how this approval process is designed.  The current process is far too bureaucratic. There needs to be a distinction between whether the executive is new to the UK financial services sector, new to the role or simply performing the same role for a different bank. Questions need to be also asked as to whether the examiners know enough about the detail of the role to really evaluate the individual's suitability and fitness to hold the position. The current process requires executives to spend a considerable amount of time preparing answers to questions that go no way to deciding whether this person is fit to perform the role. However speeding up the process should not add risk to the banking sector.

Reducing the initial capital required for a new entrant undoubtedly does increase the risk should the new entrant fail. The question is whether that is an acceptable risk. Northern Rock was a retail business - it had no investment banking business. It was also not a large player. However it failed largely due to irresponsible lending. If Northern Rock had been permitted to hold lower amounts of capital the losses would have been even greater. In the rush to create disruption to the hold of the Big Five banks the regulators must get the balance right between making it easier for new entrants whilst still protecting customers from banks that are not as well established and who's balance sheets are not as well protected from changes in the market. Given the measures being taken to electrify the ring fence between retail and commercial banking that are being enforced on the large banks, the Big 5 banks will continue to be a safer option for customers than the new entrants following the introduction of lower capital requirements being proposed.

Forcing a reduction in the cost to use the payments infrastructure comes with the inherent risk that owning and managing the payments infrastructure will become increasingly unattractive to the current owners which could lead to a lack of investment which in turn could lead to a reduction in the resilience of the infrastructure which would in the long term be bad news for both customers and businesses. After 9/11 it was not the destruction of the Twin Towers that nearly brought the US to its knees, but the closure of the airspace which prevented the movement of cheques, which effectively stopped the payments structure working that was the biggest threat to the US economy. An economy cannot survive without an efficient and resilient payments infrastructure.

Faster switching will only encourage customers to move when there is a significant difference in the customer experience and value for the customer to make it worth their while.

As the government and the regulators look at the measures to create increase the number of new entrants coming into the banking sector rather than rushing these in to get good headlines thorough and considered analysis needs to be conducted to really understand the full implications of lowering the barriers to entry.

In the meantime the lack of competition in the UK banking sector should not be overstated. With the likes of Marks & Spencer, Tesco, Virgin Money, Metro Bank, Handlesbanken and Nationwide there has probably never been a time where there has been as much choice and competition in the sector.