Tesco and Virgin are heading a queue of hopefuls wanting to start up new banks in Britain. Should the Big Four be worried? Simon Wilson reports.
What's going on?
Everyone seems to want a piece of a sector characterised by regulatory and consumer uncertainty, declining profits and hyper-consolidation: British banking. Applications for banking licences are piling up at the Financial Services Authority (FSA). Meanwhile, Tesco Bank already has a licence and Virgin Money will have one shortly. The backers of these new banks see an opportunity to grab disgruntled customers from the big four players (who have 75% of the market) and a chance to grow by picking up assets cheaply. Well-capitalised new banks will also be able to profit from lending rates that are now at a record premium to the Bank of England's base rate.
Is setting up a bank easy?
No. To acquire a deposit-taking (banking) licence, applicants need to prove to the FSA that they can meet onerous capital and liquidity requirements. A bulky set of forms and enquiries must be completed and the regulator provided with documents ranging from business plans through risk-management policy statements and compliance manuals to personal and business information. The FSA then typically takes six to 12 months to reach a decision. If you are very rich, there is the faster route taken by Virgin. Earlier this month it bought Church House Trust, a small private bank based in Somerset. This fast-track approach means Virgin Money should be free to start trading as a full-service bank in about two months' time.
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Who else wants to start up?
Licence applications are confidential, and the FSA doesn't reveal how many it gets. Some reports suggest that as many as 30 applications are under consideration. However, not all are likely to be credible. One that is credible is Metro Bank, responsible for the swathe of 'love your bank' advertising posters in central London. Metro is backed by Vernon Hill, the US entrepreneur behind Commerce Bancorp, and a British marketing specialist, Anthony Thomson. Metro will offer family-friendly, convenience-focused branches that are open late seven days a week. It hopes to open 12 branches in the first two years, focused on London.
The other venture widely tipped to be granted a licence in the coming months is a new bank targeting affluent individuals and small businesses, led by Sandy Chen, a banking analyst at broker Panmure Gordon. According to recent press reports, Chen has already secured £100m in funding from Invesco Perpetual and M&G, and hopes to raise £200m by floating on Aim next month. The bank had been trailed under the name Albion Bank, but is now thought likely to be named Walton & Co. after its chairman, veteran banker Paul Walton.
Separately, the US private-equity group Blackstone is conducting due diligence on an investment in The Home and Savings Bank, which ex-Abbey boss Peter Birch hopes to launch later this year. But compared with all these upstarts, Tesco and Virgin are both already a long way down the track.
How big is Tesco Bank?
Tiny. It has assets of just £6bn, compared to (say) £1,700 billion for RBS. But its potential is huge. Already it has more than six million financial services customers, has rapidly won an 8% slice of the credit-card market, and is the UK's sixth-biggest motor insurer. This year it launches mortgages and next year will launch a current account, with future plans said to include a move into mutual funds. Its core challenge is to convert more of its 15 million Clubcard customers into financial services customers; currently the rate is 18%. Overall, Tesco's strategy looks to be steady growth via in-store branches. By contrast, Virgin Money is interested in rapid growth by acquisition and is widely touted as a potential buyer of Northern Rock, as well as assets being sold off by government-backed banks.
Should the big banks be worried?
Any new competition is a worry. Given their brand recognition and customer base, there's little doubt highly-successful, customer-focused businesses and/or trusted brands, such as Tesco and Virgin, potentially present a big challenge to the banking establishment. Banking analysts also say that brand new banks, such as Tesco and Metro, will benefit from modern, flexible core IT systems that will be superior and cheaper to run.
So it's an open field for the newcomers?
Far from it. To succeed in retail banking you need to be big. That's why so few new entrants emerge. Sceptics argue that even with brand-new technology, new banks will find themselves more expensive on a per-unit basis. Next, there is the question of trust (see below). Finally, some banks are fighting back by reinvesting in branches. They've twigged that pushing customers away to the internet makes them more profitable, but also less loyal.
Would you trust Tesco with your money?
A recent survey conducted for Moneysupermarket.com made cautionary reading for the likes of Tesco and other retail brands looking to move into the banking sector. Only 4% said they would trust a supermarket more than a bank to look after their finances. Supermarkets are already too big, said 41%, and should stick to what they do. Only one in ten thought supermarkets would offer a better service than a bank on financial products hardly a ringing endorsement. And while 24% were happy to take out a credit card with a supermarket, only 5% would take out a mortgage.
Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published Customers.com, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.
Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.
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