Showing posts with label RBS. Show all posts
Showing posts with label RBS. Show all posts

Monday, 27 January 2014

How to be a successful challenger bank


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Saturday, 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. 

Sunday, 1 September 2013

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

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

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

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

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

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

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

Sunday, 11 August 2013

Who should buy the RBS branches?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Friday, 7 June 2013

Will challenger banks make a real impact on UK lending?

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

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

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

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

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

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

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

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

Wednesday, 24 April 2013

Will Verde be Co-op's ABN Amro?


In April 2007 John Varley, then CEO of Barclays, in an attempt to vault Barclays into the Premier League of investment banking made a bid for ABN Amro. Not to be outdone Sir Fred Goodwin put together a consortium consisting of RBS, Santander and Fortis to put in a counter bid.

Through the spring and summer of 2007 a battle took place to win ABN Amro. It could be said that it stopped being entirely about the business sense of acquiring the bank and more about winning the deal, beating the other CEO. This was a deal that appeared to be personal. The price continued to rise.

Finally in early October John Varley and Barclays conceded defeat and withdrew their offer. Barclays was rewarded with being paid 200m Euros as a break fee by ABN Amro. Even at the time of Barclays' withdrawal analysts were saying that RBS was paying too much. One said that RBS was going to be struck by 'the winner's curse'.

The rest, as they say is history. The capital required, the slow down and eventual crash of the global markets and the complexity of the integration all contributed to the situation RBS finds itself in now.

Looking at the Co-op's pursuit of the  632 Verde branches that Lloyds Banking Group has to sell, there appear to be some parallels with the ABN Amro pursuit. Could it be that the Co-op will also be struck down with 'the winner's curse'?

The pursuit of Verde has not been as long as for ABN Amro but it appears to have been as personal. In July 2012 Peter Marks, the CEO of Co-op, boasted that he has taken the shirt off the back of the  Lloyds Banking Group CEO, Antonio Horta-Osario, as they agreed to a £750m price tag. Given that the expectation had been that Verde would sell for between £1.5-2bn, he may have had a point, though he may have been better keeping his opinion to himself.

However Co-op is also paying a big price in other ways to raise the capital it needs to acquire Verde. With the announcement of the sale of its Life & Pensions and Savings business to Royal London and its instruction of Deutsche Bank to find a buyer for its General Insurance business, the Co-op's existing financial services business is being taken apart in order to raise the capital for Verde. Aviva is rumoured to be interested in acquiring the General Insurance business.These deals are not dependent on the Verde deal going through, so should the deal fail the Co-op will be in a much poorer state.

Similarly RBS had to raise a lot of money in order to pay the price it had agreed for ABN Amro. In RBS's case it went to the market and executed a huge rights issue for which in a class action it is now being sued). This left RBS with a highly weakened balance sheet, which made it unable to absorb the massive change in the market. How would RBSG have fared if they hadn't pursued and won ABN-Amro? They certainly would still have had problems with their exposure to Ireland through Ulster Bank and the investment banking business would still have been hit, but with a stronger balance sheet and without the exposure to the PIIGS (Portugal, Italy, Ireland, Greece, Spain) that ABn Amro brought the size of the bailout required from the UK Government would have been significantly lower. Fred Groodwin would almost certainly be Sir Fred Goodwin and his pension would be intact.

Should the acquisition still go ahead, which is looking less likely, this will not be a simple integration by any stretch of the imagination. The integration of Britannia Building Society has proved to be a major challenge for the Co-op, Verde will far more complex. Again looking back at RBS, Sir Fred Goodwin went into the ABN Amro integration full of confidence that the bank knew how to do integrations, but Natwest was fundamentally a larger version of RBS so it was a homogenous integration, ABN Amro was an integration of something quite different from RBS and the costs of integration ballooned.

One of the worst scenarios for the Co-op is that they sell off the assets they need in order to complete the Verde transaction and then fail to close the purchase. This would leave the Co-op in a weakened position in terms of Financial Services and overall in a poorer strategic position.

Whilst Peter Marks may have got what appears to be a rock bottom price for Verde the Co-op will be tied to Lloyds Banking Group for many years to come since they have agreed to pay for and use the Lloyds Banking Group systems for the Verde branches. It will take hundreds of millions of pounds and  years to move off these systems and onto a modern architected banking system so Co-op and Lloyds Banking Group will be partners for many years to come.  The Co-op may need to be reminded of the expression that revenge is a meal best eaten cold.

In the meantime Santander has withdrawn from the acquisition of the 316 branches that RBS is being forced to sell. Santander is a bank that appears to always make smart deals - Abbey National, Bradford & Bingley, Alliance & Leicester and Antonveneta to name a few. Antonveneta was owned by ABN Amro and was one part of Santander's element of the consortium bid led by RBS. In true Santander style it sold Antonveneta on to Banca Monte dei Paschi di Siena before Santander had even taken possession making a $3.5bn profit in the process. For Peter Marks it would be sensible to contemplate why Santander withdrew from the RBS branch purchase and reflect on how that might apply to the Verde deal.

As the crunch point approaches when Co-op must decide one way or another to complete or walk away from the deal and Peter Marks looks forward to his retirement, it would be good to have one last reflection on the deal and to decide whether he would rather be John Varley, who walked away from a bad deal with his reputation intact, or Fred Goodwin who was struck down by the winner's curse.

Update April 24th 2013.

So Peter Marks made the almost certainly right decision to walk away from the Verde deal. For the Co-op to have been burdened with the debt and enormous risks of the Verde deal would not have been a good leaving present.

However it does bring into question the future of financial services within the Co-op. Having sold the life and savings business to Royal London and with the general insurance business on the blocks a question has to be whether the Co-op should pull out of financial services altogether. The integration of Britannia into Co-op Financial Services has been a major challenge and it has not resulted in a real challenger to the Big 5 banks. The Co-op is at a crossroads and needs to decide whether financial services is really a business it can be successful in.

Wednesday, 4 May 2011

Why the Big 5 banks should be pushing for the end of 'free banking' (and the government shouldn't)

With the ICB (Independent Commission on Banking) looking at increasing competition in the retail banking sector, examining the market share of the big banks and overall looking for greater fairness and transparency in charging, strongly supported by the likes of Vince Cable and other politicians, increasingly it looks as if the end of 'free banking' is in sight. Of course 'free banking' doesn't really exist, rather it is a mirage in that rather than paying directly for the services provided, consumers are made to pay by low or no interest rates for money deposited in current accounts, low interest rates in deposit accounts, high mortgage rates and even higher overdraft charges. As consumers baulk at the costs charged for loans and going overdrawn and politicians continually call for fairer, transparent charges, the inevitable conclusion is a banking system where customers pay for the services they use.

Being able to charge a direct amount for the services they provide would bring some significant advantages to the big banks in the heavily regulated environment that they are increasingly operating in. When there is more focus on the market share that each of the banks has, and where more market share is seen as bad, then the banks will want to focus not on the absolute market share but the quality of the market share.

All of the big banks today have customers that they don't make any money from. These will be the types of customers that open a current account for their household money, for their book club, for their children, where the balances are low, transactions sizes are small and they have only one product. If market share is going to be restricted then these are the customers that the banks are going to want to be shot of. The problem is that in today's banking environment it is very difficult for a bank to fire customers. However if customers were made to pay directly for the services that they use then it would be far easier for the banks to adjust their charges to either makes the low balance/low transaction value customers profitable or, better still for the banks, to encourage those customers to take their business elsewhere.

With four out of the five big banks now being run by investment bankers not retail bankers, and Barclays, HSBC and Lloyds Banking Group focussed on a strategy of raising their Return on Equity (ROE) up to at least the 14-15% range, then there is clear evidence that making customers pay directly for the services they use can help achieve this. In Australia where this model has existed for many years, The 'Four Pillars' (National Australia, Commonwealth Bank, WestPac and ANZ), have in the past enjoyed ROEs of 20+%. Even with tougher regulation they are each expecting ROEs of around 16%, significantly higher than any of the UK banks.

However whilst this all sounds very attractive for the big banks, it is not great for the new entrants, who will struggle to compete with the scale advantages that will allow the big banks to make their charges attractive for the customers they want. It also raises the big question of who will provide the banking services to the customers that the big banks don't want? It has the potential to significantly increase the number of the unbanked. As the likes of Vince Cable continue their crusade against the banks and push for ever more transparency of charging for banking services, the politicians need to be wary of the consequences of getting what they wish for.

Friday, 25 March 2011

RBS to provide insurance to Sainsbury's

Sainsbury's is in talks with RBS  to provide insurance to the supermarket's customers for the next five years. The deal is expected to be announced in June.

This is an interesting move on the part of Sainsbury's since RBS has to dispose of RBS Insurance as part of the price for taking state funding due to the financial crisis. RBS Insurance has been on the market for some time, but there are no indications of a deal any time soon. This is hardly surprising at a time when personal lines insurance, and particularly motor, is proving to be so unprofitable for insurers with the increase in claims for injuries fuelled by the no-win, no fees, ambulance-chasing claims companies. Whilst a few years ago RBS Insurance business, including such well known brands as Direct Line and Churchill, would have sold for a significant premium, now it would be quite the opposite.

Sainsbury's is obviously demonstrating confidence in RBS Insurance being around for at least the next five years, so presumably with so little interest from acquirers RBS must be exploring the idea of a flotation for the business.