A financial services shake-up is set to revolutionise high street banking

Published on Saturday 31 October 2009 13:55

Rosemary Gallagher analyses how the 'shopping basket' mentality will affect Scotland

NEELIE Kroes, the tough-talking European Union commissioner, is continuing to make waves with her rulings that are changing the shape of the British high street beyond recognition.

Virgin Bank and Metro Bank signage could one day be brandished across buildings that currently house Lloyds TSB and Northern Rock. The Santander name is replacing Abbey in every town and city across the UK and Bank of China may become a household brand. Out-of-town shopping malls are likely to have a Tesco Bank branch alongside the magazine counter.

The financial crisis has seen traditional names, such as Royal Bank of Scotland, being dealt a massive blow by being forced to go cap-in-hand to the state for bail-outs. The high-profile run on Northern Rock in September 2007 and its subsequent nationalisation would have seemed like a work of fiction during the boom years of the late 1990s and early 21st century but, as we all now know, that is a reality.

Last week heralded the start of even more shake-ups in the sector. Speculation is mounting that Kroes will soon order Lloyds Banking Group to sell its substantial Lloyds TSB branch network in Scotland, Cheltenham & Gloucester and internet bank Intelligent Finance. The three brands combined are likely to be snapped up by one buyer, with Tesco, Sir Richard Branson's Virgin and Spanish group Santander all tipped as potential bidders.

Whatever happens, the Lloyds TSB Scotland brand will vanish as the group has said that Bank of Scotland will be the name it retains north of the Border.

Kroes has been keeping busy when it comes to her plans for British banks. Also last week she ruled that Northern Rock be split in two. It will be divided into a "good bank" called Northern Rock plc, housing deposits and mortgages, and a "bad bank" known as Northern Rock Asset Management. While the latter will ultimately be liquidated, Virgin, Santander and Clydesdale owner National Australia Bank are all contenders to snap it up. Tesco Bank, headed by veteran banker Benny Higgins, has ruled itself out of the race saying its branch network and mortgage book are not on his shopping list.

So, what is the future shape of banking in the UK, and what will it mean for Scotland, which no longer has a strong independent bank sector?

Pre-credit crunch, the UK retail banking market was dominated by Barclays, HBOS, HSBC, Lloyds TSB and NatWest/Royal Bank of Scotland (RBS). Although Abbey had already been gobbled up by Santander in 2004, its brand was still on the high street. Then there were a plethora of smaller players, including Northern Rock, Bradford & Bingley (B&B) and Alliance & Leicester (A&L), which focused on the mortgage market.

HBOS was rescued by Lloyds last year to create Lloyds Banking Group, which is now 43 per cent state-owned, RBS was bailed out by the government, which has a 70 per cent stake in the institution, and Santander snapped up the "good" parts of B&B and A&L.

Further changes are afoot. RBS is planning to revive the Williams & Glyn name to re-brand its 312 RBS branches south of the Border and sell them off. This move will help appease Kroes' concerns about the market dominance of state-owned banks. It is likely to mean she will be less stringent on RBS when it comes to issuing a ruling on which parts of the bank will have to be off-loaded.

Lloyds is currently considering whether to tap investors for 20bn to shore up its balance sheet and avoid the government's costly asset protection scheme (APS). If it is successful in its fund-raising efforts, Kroes is expected to give Lloyds more freedom when it comes to deciding its future structure.

US entrepreneur Vernon Hill is preparing to launch Metro Bank with 400 branches in the UK and Panmure Gordon analyst Sandy Chen has applied for a banking licence. He does not yet have a brand name for his operation, having been scuppered by RBS in his attempts to revive Williams & Glyn. Chen means business as he is said to have industry heavyweight Sir Peter Burt, a former chief executive and governor of Bank of Scotland, on board.

Hill and Chen are far from alone in their drive to create new banks. The Financial Services Authority has confirmed that it is dealing with a high number of applications for licences.

More overseas banks, particularly from emerging markets, are expected to see the UK market as rich pickings now that consumers have lost trust in the traditional brands, according to analysts. Bank of China, for example, has already started offering mortgages.

These developments are all part of a seismic shift in UK banking and the sector's relationship with the public.

Rebecca Heaney, managing director of RAPP marketing agency in Scotland, says: "Some of the traditional banks are simply failing to adapt to changing consumer demands either through lack of innovation in not getting their multi-channel offering right, or by failing to really understand what their customers want.

"This is where those brands such as Tesco and M&S come in because they put the customer at the heart of their business. And if you understand your customer and they trust you to deliver value and quality then they will buy other products, including financial services from you."

She adds that consumers are looking to have deeper relationships with fewer brands, and value, quality and trust are at the heart of that relationship. "These are the brand values which traditional financial services companies are failing to deliver to their customers and why they are failing," she says.

There are many reasons why the new kids on the block will succeed where traditional banks have failed, but the old industry stalwarts do have the chance to re-invent themselves rather than vanish from the high street altogether. When the dust settles, the big winner should be the British consumer, say marketing commentators.

A branding expert, who has worked with both the old and new players, says: "One positive thing that has come from the meltdown of the world's leading banking brands is that it has forced them to change the way they do business. It has opened the doors for trusted consumer brands to expand into that once exclusive market.

"This has to be a good thing because market forces will demand transparency and value for money."

He adds that customers will no longer feel the need to "bank for life" and the "shopping basket" mentality will extend to financial products and services. "It's been coming for a while but the events of the last 18 months have escalated the change."

However, he adds a note of caution. "There is clearly more to running a traditional bank than running a shop.

"The new players will do well around certain types of products but will they make serious inroads into current account and mortgage markets? "

Analysts are in agreement that the buying power of Tesco and the wealth of data it has on customers through its loyalty card scheme will undoubtedly make it a force to be reckoned with. One analyst says: "It's hardly surprising Tesco has distanced itself from Northern Rock. It already has a banking licence and it's building a branch network though its stores."

Its first branch was at the Silverburn shopping centre on the outskirts of Glasgow and it is now rolling the concept out in other locations.

When questioned about possible interest in Northern Rock last week, Higgins said: "Why would we be interested in a branch network on a high street where no-one goes, when we have stores where there are lots of people? There is no obvious attraction to the high street."

And Tesco Bank chairman Andy Higginson said he had looked at Northern Rock as a way into the mortgage market but had decided not to make an offer.

North of the Border, following last week's takeover of Standard Life Bank by Barclays, the only remaining independent is the Airdrie Savings Bank. But it is a relative minnow, which has stuck to its knitting while its much larger peers overstretched themselves, in particular RBS's Sir Fred Goodwin who pushed on with ABN Amro which proved to be "one deal too many".

But does it really matter that Scotland is rapidly losing corporate banking headquarters?

Bryan Johnston, senior divisional director at stockbroking Brewin Dolphin, says: "It's not an issue of jobs today, but jobs tomorrow."

He explains that while we have not yet endured the feared wave of redundancies, and that may never come as employees are carrying out vital operational activities, future job creation within the sector in Scotland will be limited. The absence of head office functions will also impact a number of sectors, such as accountancy, law and IT, which relied on the banks for much of their business. "An independent banking sector is good for local companies and to attract investment," says Johnston.