Showing posts with label Virgin Money. Show all posts
Showing posts with label Virgin Money. Show all posts

Thursday, 30 April 2015

Can Yorkshire Bank and Clydesdale Bank become challengers?

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

A history of innovation

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

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

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

What would it take to become a challenger?

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

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

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

What do Yorkshire Bank and Clydesdale Bank bring?

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

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

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

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

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

Who might be interested in acquiring Yorkshire and Clydesdale?

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

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

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

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

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

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

 

 

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.

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.

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.

Tuesday, 13 November 2012

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



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

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

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

Why would anyone want to buy this business?

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

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

Who are the potential buyers?

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

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

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

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

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

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

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

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

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

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

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

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

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

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Tuesday, 28 August 2012

Is free banking holding back competition?



The UK Parliament review of the banking sector following a summer of scandals across the sector has, once again, raised the question of whether the end of the British system of so-called 'free banking' would introduce further competition into the sector. There are many who argue that free banking is a major barrier to entry for new competitors in the sector. However there is no evidence that this is the case.

In Australia, where there is the greatest transparency the cost of banking, where almost every transaction attracts a fee, the market is dominated by the so-called Four Pillars - ANZ, Westpac, Nab and Commonwealth Bank. There are smaller players such as Bendigo Bank, but despite the lack of free banking the split of the market is almost identical to that of the UK.

A number of new entrants already operate, or have announced that they will, exclusively non-free banking. Handelsbanken, the most successful of the new entrants with over 100 branches and the highest customer satisfaction of the UK banks (see http://www.itsafinancialworld.net/2012/01/customers-love-banks-who-charge-them.html), does not offer free banking. Marks & Spencer have announced that their current account will charge fees and even Virgin Money, the consumers' champion, has announced that its current account will charge a 'small fee'.

So whilst there is increasing competition in the UK retail banking sector why are the new entrants not able to make any more than a small dent in the share of the big five banks (Barclays, Lloyds Banking Group, RBS, HSBC and Santander)? One of the key reasons is the economies of scale required to be profitable in retail banking.

Owning and operating the infrastructure (the ability to process standing orders, direct debits, transfer money, access to ATMs etc) required to process billions of transactions reliably requires very large amounts of capital. Whilst the recent issues that RBS recently had with processing transactions, the UK banking infrastructure is amongst the most reliable in the world. Returning to Australia, the banks there have had far more problems with their payments infrastructure than the UK, despite having far lower transaction volumes.

New entrants today are able to use the Big Five's infrastructure. Whilst they may argue that the cost they pay is unfair and has little transparency as to the basis of  the charge, it is certainly a lot cheaper than building their own. In itself these costs are not the reason that holds back their success against the Big Five.

The biggest scale advantage that the encumbents have is  operating capital. This was most recently illustrated by the competition for the Verde branches that Lloyds Banking Group had been forced by the EU to dispose of following the state bail-out after the acquisition of HBoS. Whilst there are a not insignificant number of players who would like to enter or grow their footprint in the UK banking market such as JC Flowers, Virgin, Metro Bank and NBNK, they either weren't able to or were unwilling to raise the amount of capital required to become a significant player in the market. This situation has become further exacerbated since 2008 with capital being even harder and more expensive to find. To make the situation worse the amount of capital required to be held has been raised higher following the banking crisis. Here the established banks have a distinct adavantage as the requirement for capital is lower for them than for new entrants to the market. This is clearly a major barrier to entry.

Another significant barrier to entry for new entrants is the increased scruitny and additional regulation as a result of the banking crisis. This means that it takes longer and is far more difficult for any new entrant to get a banking licence and to get its executives approved to run a bank. This was one of the major hurdles that has held up the launch of Tesco Bank.

It is very convenient for politicians to blame the lack of competition for the Big 5 on free banking, however those politicians need to reflect on their own role in making it more difficult for new competition. The UK government wants to have a safer banking sector and in so desiring and by its actions has made it more difficult for new entrants.

Friday, 8 June 2012

M&S to take on high street banks



UK retailer Marks & Spencer is to launch M&S Bank, rolling out 50 branches over the next two years. A 50:50 joint venture with HSBC with current (checking) accounts to be launched in the Autumn and mortgages 'later'. This gives M&S a head start on Tesco who has had to delay the launch of its current accounts until 2013. Ironically these two 'new' retail-based banks are frequently adjacent neighbours on retail parks across the UK, where the big four high street banks are rarely to be found, so it maybe that they find themselves competing with each other rather than taking on the big boys.

Of course neither Tesco or M&S are really new entrants into Financial Services both have been offering products for some time. M&S first started offering FS products in 1985 and has the successful &more credit card, but this will be the first time it is calling itself a bank.

The timing of M&S's announcement is good. Not only does it come after a set of disappointing results for its retail business, it comes at a time when the high street banks are both unpopular and mistrusted. This can only be good for M&S with it's slightly older, more affluent and loyal customer base.

With the opening hours of the branches being the same as the retail stores and the initial prototypes of the branches looking very retail, calm and sophisticated and, as they are keen to point out, with fresh flowers, this will, to coin their phrase, not be any bank it will be a Marks & Spencer Bank.

But will it really shake up competition in the banking sector? Fifty branches over two years is not that many. Given that Virgin already has 75 branches (since its acquisition of the 'good' Northern Rock), Yorkshire Building Society has 227, Handelsbanken (the least well known, but the bank with the highest customer satisfaction) has over 100 branches and whoever (Co-op, NBNK or a flotation) acquires the Verde branches, that Lloyds Banking Group has to dispose of, will have 632 branches, just like Metro Bank with its 12 branches, this is not going to be an immediate threat to the high street banks.

Certainly in the short term it will not make a significant difference to the M&S share price. However it has every chance of being a success that will build over time. M&S has decided not to take the route that Tesco is finding to be so challenging of going it alone without a bank behind it. M&S by partnering with HSBC is able to stick to what it does best - retailing while HSBC can focus on managing the banking operations. The CEO of M&S Bank, Colin Kersley, was with HSBC for 30 years, so he knows the bank extremely well. The UK CEO of HSBC is Joe Garner, who spent his early career with Dixons. The two organisations have worked together for a number of years (HSBC acquired M&S Money) and understand where each is coming from, so this has to be a significant advantage.

Overall from a consumer perspective this move by M&S is to be welcomed. Whilst Joe Garner is quoted as saying that this is 'the most significant innovation that HSBC has carried out since First Direct' only time will tell whether he is right.

Tuesday, 1 May 2012

NAB withdraws to the north - the end of innovation?



The announcement by National Australia Bank (NAB) that they are to close 29 of their business lending centres in the south-east of England and withdraw back to their northern roots, abandoning 80,000 customers, marks the end of an experiment initially started by John Stewart, then CEO of NAB, and more recently Lynne Peacock, until last year CEO of NAB in the UK.

John Stewart and Lynne Peacock worked together for many years at the Woolwich Building Society, where they were responsible for launching the UK's first flexible mortgage, the Open Plan mortgage, combining a savings account with a mortgage account, offsetting savings interest against mortgage interest. Ironically the Open Plan account was based on Australian flexible mortgages. Such was the success of the Open Plan account that Barclays decided to acquire The Woolwich and centre their mortgage business around their acquisition.

John Stewart was seen as an entrepreneur,leading Financial Services industry development and was subsequently hired by NAB to lead the business in Melbourne. He brought Lynne Peakock along, initially in Melbourne and then to lead the UK business consisting of Clydesdale Bank and Yorkshire Bank.

Once again, looking at how he could make a small player in a crowded market stand out from the crowd, he and Lynne Peacock came up with a strategy to take the strong Yorkshire Bank brand down to the sout-east and take on the Big 4 banks in their traditional territory. They came up with an entrepreneurial model where banks managers were allowed to operate like a franchise, to be directly rewarded for the performance of their branches, or Business Lending Centres, to be able to make lending decisions with less referral to the centre and therefore quicker decisions for customers. Their Business Lending Centres look like airline lounges, customers could use them to conduct their own business when in town, creating a very different customer experience. They even went so far as to organise 'speed-dating' for buinesses, whereby SMEs could meet other SMEs in order to do business with each other introduced by NAB. At the time  NAB was, once again, seen as leading the way in terms of a new banking model, of a new customer experience and indicating where the banking industry needed to go. The model was successful with the lending book growing at above market rates.

Many of the ideas that he and Lynne Peacock came up with have been emulated by other banks such as Handelsbanken (see http://www.itsafinancialworld.net/2012/02/who-said-branch-banking-was-dead.html , http://www.itsafinancialworld.net/2011/06/forget-virgin-money-or-metro-bank.html ), where the bank manager is master of his own business. NBNK in describing the type of banking they want to launch also describes something that is very similar to the NAB model. Metro Bank has gone some of the way towards this as has Virgin Money.

The reason that this has not worked for NAB is twofold. Firstly the focus was on commercial property lending. Since even before 2008 the commercial property market was overheating and finally burst, but like HBoS, NAB continued to lend and has, as a result, got a disproportionate amount of bad loans. Undoubtedly one of the reasons why the book grew so fast was because of the franchise model where the managers were paid in direct relation to the loans they made, which encouraged lending and discouraged caution. The second reason is that whilst NAB provided an excellent customer experience the customers were not prepared to pay for that. This is something that many banks face in a heavily commoditised market where there is the perception of 'free banking'.

In many ways it is a great shame (not least for all the people who will lose their jobs), that what NAB set out to do has failed. Certainly a number of the players, such as JC Flowers and NBNK, who have stated that they want to enter the UK banking market should consider whether acquiring the UK southern assets of NAB should be an option, rather than acquiring all of NAB UK.

Monday, 16 April 2012

Is NBNK drinking at The Last Chance Saloon?



With the speculation that NBNK are pulling out of the bidding for National Australia Bank's UK banks, Yorkshire and Clydesdale, due to the price being asked being unrealistically high. given is that the level Given that the level of impairments in NAB's UK mortgage book could be as high as 30% and the desire of Cameron Clyne, CEO of NAB, to get a price that the market won't bear, this, if confirmed, would be a wise move on the part of NBNK.

Given the market sentiment towards the banks, particularly with the uncertainty of what will happen in Europe and the faltering UK economy, now is not a good time to sell banking assets. For NAB or any other banking organisation looking to sell out of the UK when there is a focus on building capital reserves taking the write down on UK banking assets would not be seen to be a smart move by investors.

NBNK (New Bank) is an investment vehicle backed by some of the biggest asset managers and led by Lord Levene, former Chairman of Lloyds of London, the insurer not the bank, with the sole objective of buying banking assets. Having lost out to Virgin Money, which bought the Northern Rock 'good' bank, and not being selected as the preferred option for the Lloyds Banking Group sale of 632 branches (Project Verde), the options for NBNK do not look good.

With the negotiations between Co-operative Bank and Lloyds Banking Group for Verde floundering, NBNK last week put in a revised proposal for Verde. The response from Lloyds Banking Group was cool. Whilst they acknowledged the receipt of the letter, they re-emphasised that they are in exclusive talks with the Co-operative Bank.

It is increasingly unlikely that the Co-op negotiations will end successfully with questions over the structure, governance, ability to raise capital and the ability to execute on the deal being raised by the FSA (Financial Services Authority).

If the Co-op is unable to get to an agreed deal will NBNK be re-invited into negotiations? Currently the Lloyds Banking Group stanc is that their fall back position is a floatation of a mini-me version of Lloyds TSB. However this would require investors backing the IPO and there is certainly skepticism amongst the investment community as to whether that would be achievable. If banking assets are seen as generally undesirable at the moment what is going to change for a Lloyds Banking IPO? The concerns about an IPO would not just be limited to the ability to raise the finance, but equally the leadership of the mini-me Lloyds TSB would be scruitinised by the FSA. The current leadership of Verde does not consist of obvious big hitters and would need to go through the FSA approval process, before the deal could get away. For Tesco it took nearly two years to get that approval.

For NBNK, if they are invited back into negotiations then they would need to conduct a very detailed due diligence as the deal execution risks are very high. After all the systems and processes that Lloyds Banking Group are putting into the deal can't be that good, otherwise why is LBG spending more than a billion pounds on the post-merger 'Simplification' programme, much of which is being spent on the technology that they are suggesting that the buyer would be stuck with for not an inconsiderable time?

For NBNK with so few opportunities out there to acquire banking assets, are they now drinking at The Last Chance Saloon? Is it time to call last orders, to close down the fund and gracefully walk away?

Tuesday, 20 March 2012

Will the sale of Verde by Lloyds Banking Group to the Co-op complete and it is good for consumers?



The announcement by Lloyds Banking Group at the end of last year that LBG were in exclusive talks with Co-operative Financial Services (CFS) for the sale of the bundle of  632 branches and brands that is referred to as 'Verde' raised the question of whether this is good for UK banking and consumers. Clearly Gary Hoffman, Chief Executive of NBNK and former CEO of both Northern Rock and Barclaycard, didn't think so. “Lloyds has made the wrong decision. There is no question that the execution risk with the Co-op is much more significant, and over a very short period of time this will be proven". It could be argued that this is just sour grapes, given that Gary Hoffman's NBNK (a vehicle with significant institutional backing set up to buy one or more banks) was also bidding for Verde and didn't make the cut, however Gary Hoffman is one of the most experienced retail bankers in the UK and led Barclaycard to be one of the most successful credit cards businesses in the world, so he does know what he is talking about. With the expiry of the exclusivity agreement and the invitation of NBNK back into discussions, Gary Hoffman may yet prove to be right.

Merging Verde with the Co-operative ticks all the boxes for the ICB (Independent Commission on Banking) in that it will create a competitor with around 7% market share in current accounts and is building on an established player, both recommedations made in the ICB report. However that still doesn't answer the question of whether it will really become an alternative to the Big 5 banks.

Unlike Virgin Money (see http://www.itsafinancialworld.net/2011/12/is-northern-rock-decision-good-for.html ), the existing Co-operative Financial Services is largely undifferentiated from the Big 5 banks. Whilst it makes a lot of its ethical stance it was still caught up in the Payment Protection Insurance (PPI) misselling scandal, writing off £90m, which, in fairness, is a lot less than the major high street banks, but is still significant. CFS is hardly the most customer centric organisation. Until very recently the payment terms on its many charity-branded cards were so tight that unless you opened the credit card statement on the day you received it and made payment within a couple of days it was impossible to avoid charges for late payment. Hardly a customer friendly or ethical way to operate. This has now been addressed.

If you look at the high street presence of the combined CFS and Britannia branches (CFS acquired Britannia Building Society in August 2009), the offering and customer experience is dated and certainly no better than the major high street banks. With the addition of the Verde branches CFS will have around 1000 branches.

In the digital space CFS has in the past won many awards for its direct bank, Smile, but the lack of investment in this operation  has meant that it has not kept up with what customers are looking for from a digitally-enabled bank and is not sufficiently different to attract customers away from more traditional players. The same could be said of Intelligent Finance, the brainchild of Jim Spowart, which CFS acquires as part of the Lloyds Banking Group Verde bundle.

For CFS to really become the challenger that the ICB is so keen for it to be then CFS needs to significantly invest in fundamentally changing the branding and customer proposition that the combination of Co-Operative Financial Services, Britannia, TSB, Intelligent Finance and Cheltenham & Gloucester brings. With such a diverse group of brands with different values and attracting different segments it will not be clear to customers what it stands for and why they should engage with it. CFS will need to simplify, move to a single brand with a strong customer proposition which is more than just being an alternative to the other banks. It needs to design a customer-centric bank where branches are but one part of the overall way that customers can engage, digitially enabled and fit for 21st Century Customers. That requires a lot of investment, above and beyond the capital required to acquire Verde, the hundreds of millions required to integrate Verde whilst still keeping the lights on, and ensuring the Verde customers don't defect before they are transferred. With no shareholders to turn to and the wholesales markets still not working efficiently finding the funding at an affordable price is an enormous challenge for CFS.

Over the following few months as the negotiations continued with Lloyds Banking Group, CFS got to understand more about what it is undertaking, but still has to establish whether it can raise the funding and only then will it become clear whether CFS is going to be able to close the deal. If they do, but don't invest in the transformation, then what the UK consumer will get is just another high street bank and the hopes of a challenger that the ICB had will be just that, hopes. If CFS embraces the challenge then the re-born CFS could be a really exciting, ethical, customer-focussed challenger and the Big 5, as they wrestle with implementing ring-fencing, should be seriously worried.

The concerns don't only lie with the Co-op. For Lloyds Banking Group having just come off the back of spending nearly £4bn on the integration of Lloyds TSB and HBoS, the question of just how much it will cost to separate what constitutes Verde from the mother ship is concerning. Anything over £1bn would be a real challenge for LBG given everything else they have on their agenda. The Co-op target systems are not ideal, particularly as they still haven't completed the integration of Britannia, so increasingly the deal may be looking less attractive to LBG.

As is increasingly looking likely they reverse their existing banks into Verde sticking with the LBG systems, they will end up with superior systems than they have today. Unlike RBSG, the Lloyds Banking Group systems, based on the original TSB systems are real-time and not significantly batch-based. This gives them significant advantages in dealing with customers demanding real-time banking. However CFS will end up with the suboptimal LBG systems as Lloyds is spending significantly on 'simplifying' their systems, but only for the LBG version not the ones going to Verde. This means that Verde will be disadvantaged to LBG, so may not be as competitive.

The FSA (Financial Services Authority) is now demanding that, assuming the Verde deal goes through, given that Financial Services will be around 40% of the Co-op's business that the governance appropriate to a bank is put in place. This would mean having a board made up of executive and non-executive directors that would need to be FSA approved. Given the time it is currently taking for the FSA to approve executives is measured in months not weeks and that the Co-op doesn't currently have a CEO for its Financial Services business (though interestingly Gary Hoffman has allegedly had conversations about filling this role) this could be a deal breaker. However Lloyds Banking Group could sweeten the deal by providing a team of seasoned managers to run the business. Whilst this might put the FSA's concerns about leadership experience to bed, how radical will this new competitor be if it is being run by the same people who ran Lloyds Banking Group?

On top of that the Co-op as a co-operative is currently governed by its members. The FSA's requirements fundamentally challenge the way that the Co-op wants to run its business.

The possibility of  CFS walking away from Verde is looking increasingly unlikely.
There is still the chance that an  IPO is the more attractive solution for LBG given how cleaner and simpler that will be for the bank, however with bank asset prices at an all time low at what price would the IPO get away?

It looks like CFS may have got their deal, but will they suffer from buyers' remorse?

Thursday, 20 January 2011

Why portable bank accounts aren't going to be here anytime soon

At the Treasury Select Committee on Competition and Choice in Banking, Jayne-Anne Gadhia, CEO of Virgin Money proposed that one day she would like to see portable bank accounts in the same way as today where you can have a mobile phone number for life. She is not the first person, nor will she be the last, to suggest this as the way to make it easier to move bank accounts, create more competition in the market and make it easier for new entrants to rapidly build up market share.

Across on the other side of the world the Commission looking into competition in the Australian banking market also considered this as the way to make switching banks easier. There were many in Australia who hoped that the implementation of portable account numbers would be one of their recommendations that would pass into law. Having taken hearings on the topic instead a review into the feasibility of this has been commissioned, effectively kicking it into the long grass.

In theory it certainly sounds like an attractive solution to overcome the reluctance of customers to move their bank accounts. Customers can do it today for their phones, gas and electricity, so why not for their bank accounts?

To find out why it is not as simple as that you have to understand the origins of our bank account numbers. When banks originally started operating your bank was effectively your branch. You would go into your branch to pay in some money and the amount would be handed over the counter and the clerk would write with his quill pen in the ledger on your account page  how much you have paid into your account. When you wanted to take some money out, the process would be reversed, the money would pass the other way over the counter and the clerk would write down the withdrawal amount with the quill pen in the ledger.

Not a lot has changed since then, particularly with some building societies where there is no on-line updating of accounts but rather entries are held locally in the branch ledger (albeit electronic) until the end of the day when the accounts are balanced and head office updated. Even in today's global retail banks customers have to 'belong' to a branch and the bank sort code and account are associated with a single branch. The whole payments process that transacts millions of transactions every day and the cheque clearing process are all based around the premise that a customer is identifiable by their sort code and account number. Each bank has a set of sort codes that tells the payments system which bank to transfer the money to and to which branch

To have portable bank accounts the connection between the customer and their bank and their branch would need to be broken and replaced with some other identifier. This is not minor surgery, it is more like a heart, lungs and brain transplant all being performed simultaneously with the added handicap of the anatomical guide to the human body having gone missing. It would effectively mean the re-writing of not only the core banking system of every bank but also the re-writing of the payment systems. Almost all of our banks and building societies are working on extremely old banking systems for good reason.The banks have shied away from replacing because the knowledge of exactly how they work has been lost as the original programmers have either retired or gone up to the great card punchrooms in the sky, and the risks associated with refurbishing or replacing them have been seen as too high and the benefits too low.

At a time when governments all over the world are looking at de-risking banks and where over the last few days and months we have seen National Australia Bank losing its payments systems for a couple of weeks, Bank of Ireland's systems going down,  Lloyds Bank's payments system paying out double and Bank of America losing its core systems for a weekend, no politician is going to mandate the high risk action that the banks must make the changes to make portable bank accounts viable.

You can completely understand why new entrants would like portable bank accounts as a way of easing their way into the market, but the reality is that it isn't going to happen anytime soon

Update June 2011.

The proposal by Lloyds Banking Group that the banks should create a shared database of direct debits and standing orders so that when a customer switches banks the direct debits don't get lost in the process appears to be getting traction across the banking industry. It is based on the model deployed in The Netherlands and is also being considered by the Australian banks. Lloyds is estimating that the cost of this change for the industry could be in the order of £2bn. This is still major surgery on the core banking systems but it is not the full blown account number portability that mnay new entrants are calling for.

Account number portability is increasingly becoming irrelevant. When more and more people don't even know their own telephone numbers, let alone others, due to storing their numbers in their phones, on their computers and iPads, and having the ability to speed dial, it brings further into question the need to know a long bank account number. With the increasing use of alternative ways of identifying yourself, the growth of mobile payments and the alternative means of making person-to-person payments then the need to know your account number will become increasingly redundant.

There are two real issues that stop people switching. Firstly there is the lack of sufficient differentiation between the banks to make it worth people changing bank accounts - banking continues to be seen universally by customers as a commoditised and poorly delivered service. Secondly there is the fear that the process will fail and extra costs and hassle will be occured. The Lloyds Banking Group proposal will only help address the latter (and will be some considerable time coming).

As the banks wrestle with the paradox of how they can make it easier for customers to leave them whilst retaining their customers then their focus has to be on how they differentiate themselves in the eyes of their customers and that is where the investment really needs to be.