A good time for a new bank?

One of today's headlines states: the time's right for the bold to enter banking.

I agree, but based upon what I see happening right now, there's very few people being bold.  They are just following the same old way of doing banking business.

For example, call me a party pooper or something, but I cannot believe all these people who think they can make a difference to retail banking by opening up a retail bank with branches.

Why would you open a bank in the 21st century based upon branches? No-one goes to a branch except to deposit a cheque. And cheques are dead by 2018, so the only reason you’d open a bank today is to open one without branches surely?

And yet Virgin, Tesco, Metro and the Post Office are all opening new branch-based banks.

Is this madness or is there a logic to this madness?

Well obviously, there is a logic and that logic, as put to me by all banks and bankers, is that the #1 area for any account opening activity is through the branch network.

Remote account opening just does not work.

So what are the new banks, and particularly Virgin, Tesco and Metro, thinking?

Well each has a different challenge, the first of which is to get a banker’s licence.

Banker’s licences are like gold dust, subject to rigorous vetting and requirements for strong executive credentials and balance sheet approvals.

For example, here’s some words of gravitas from Thomas Huertas, FSA Director of Banking, in June 2008:

In light of the protection afforded to deposits and the trust that the public should be able to place in banks, any institution or person seeking to own or manage a bank must demonstrate to the authorities that it or (s)he is "fit and proper". Banks receive a license to take people's deposits, and the authorities need to be sure that they are granting that license to someone who will not simply take people's money. For this reason, those seeking to control a bank must meet what the Financial Services and Markets Act  terms "threshold conditions" -- that they have the integrity, financial and managerial resources necessary to run a bank, that they are worthy of the trust that people expect to be able to place in the bank that holds their deposits and, in many cases, their life savings. Banks and their controllers need to meet these threshold conditions at entry and on an ongoing basis.

You would think with such stringent requirements that banks could not fail, wouldn’t you? And they wouldn’t, were it not for global markets and complex derivatives that simplistic bank executives did not and could not understand ... but that’s another story.

The result is that, due to the recent bank failures, it is actually far more difficult now than ever before to get a banking licence.

This is why Metro has taken so long to gear up for launch – jumping through the regulator’s hoops to get their licence – and why Virgin has acquired a bank in order to get theirs.

So you get a banking licence ... what next?

Create the internal infrastructure, choose a core banking platform, deploy staff and plan launch.

All sounds so easy doesn’t it, but it isn’t because each strategy demands massively different approaches.

If you are growing organically for example, then you can choose a fresh technology platform and fit your business to the platform; whereas, acquiring another’s existing infrastructure through buying a branch network, implies massive conversion and transaction costs, not just for the systems, but also the training of staff and organisation.

The latter challenge is what the Santander’s and Lloyds’ are going through right now where, in usual fashion, the acquired bank’s organisation is transitioned onto the acquiring bank’s infrastructure. This means that all the staff in the acquired bank have to be trained in the acquiring bank’s systems and processes. That is no small task in itself and, for a Virgin who are likely to acquire branches from Northern Rock, Lloyds and RBS, this will be a core challenge in their approach.

Growing organically may also sound worthwhile as you can begin with a totally greenfield approach, but this also has issues. For example, Metro Bank intend to grow organically to over 220 branches by 2020, starting with four flagship branches this year. But 220 branches is still a far cry from 2,200, which is the sort of branch density each of the Big Four incumbent banks claim.

Even acquiring branches may not give fast results. For example, if Virgin acquires Northern Rock they immediately gain 70 branches (and £19 billion in deposits and £10 billion in loans) but 70 branches is peanuts, as Santander have discovered.

That’s why Santander acquired Bradford & Bingley’s (B&B) and Alliance & Leicester’s (A&L) branches over the past year to add to their Abbey franchise.

The result is that Santander now has over 1,000 branches and are ready to compete against the Big Four – RBS, Lloyds, HSBC and Barclays – across the UK.

So, we have a Big Five. Add on National Australia Bank, Nationwide Building Society, the Post Office and you could claim a Good Eight.

Virgin and Tesco make that a Decent Ten.

Ten Decent Banks competing on the high street for our banking business.

And the UK authorities claim there is no competition here, when most markets are dominated by just two major players?

Admittedly, today, there are only four real powerhouses here but there is room for another one and, of these, the ones that I would be most alert to are Santander and Tesco.

Santander because they’re a bank, so they join the incumbent four.

Of the new boys, Tesco is the one that should have the greatest opportunity to shake things up.

Why?

Because Tesco already have the branch infrastructure and experience.

Like Virgin, Tesco has been marketing personal financial products since the mid-1990s but, unlike Virgin, Tesco has over 2,000 branches. Physical stores. Distribution outlets.

This is why Tesco reject the need to buy branches: “the only reason to buy a lender such as Northern Rock, or any offshoots of either the state-backed Royal Bank of Scotland and Lloyds, was to buy a well-known brand, existing customers and a branch network – and Tesco did not need these.”

Tesco are also a full service retailer, unlike the banks, and – as discussed recently in this blog – they have a really strong, intimate, customer analysis and relationship management system for selling and cross-selling.

So, of all the new players, Tesco are the gorilla in the room.

They can not only offer better rates and products than incumbents based upon interest rate churn – just use their cash pool* – but also have the experience, brand and distribution network to win.

For these reasons, if I were opening a new bank in Britain today, the last thing I would do is create one with a branch network.

There are too many of them out there and little reason to change.

Instead, if I were opening a bank in Britain today, I would build a really strong internet-based, mobile and call centre focused operation, leveraging social media and networking.

But then I’m biased (as everyone who reads this blog knows).

* As demonstrated by this comment from Steve Perry, executive vice president of Visa Europe:

“Why do you think supermarkets introduced cashback ... it's because they want cash out of the system so there is less to manage.”