Signing the £1 billion deal to buy Northern Rock has given the Edinburgh-based banker the long-awaited platform on the high street from which to launch her brand into the current account and mortgage markets. Business banking is set to follow.
But even as Chancellor George Osborne hailed the birth of a “powerful new presence on the high street” which would offer “real choice and competition”, analysts pointed out that the combined bank would still be a minnow compared with existing institutions. With 75 soon-to-be rebranded Northern Rock branches across the UK, plus a handful of Virgin’s lounge-style outlets, the new bank will be dwarfed by the “big five” – Lloyds, RBS, Barclays, HSBC and Santander.
Virgin is being willed on by consumer and business groups, plus the UK government, which is committed to increasing competition as part of sweeping banking reforms. But analyst Nic Clarke, of Charles Stanley, says the idea of an entrant coming in and challenging Britain’s big five is just that: “a nice idea”.
“I just can’t see them having the critical mass to do it,” he says.
If Virgin tries to expand its business at the kind of pace that would see it rival the big players in the foreseeable future, it risks encountering the same problems that got Northern Rock into trouble, Clarke argues. Instead, building up the customer base is likely to be a long hard slog.
“It’s something to build on, but it takes years and years of selling more mortgages than your market share to really grow. Northern Rock was shooting the lights out and it took it a long time to make any headway against the big banks.”
Clarke says the same will probably apply to the bank set to be created when Lloyds finally sells the package of branches, accounts and mortgages known as Project Verde, which it is being forced to divest by the European Union. With 632 branches, that’s much bigger than the combined estate of Virgin and Northern Rock, but still only a fraction of Lloyds’ overall business.
Firms north of the Border would be particularly keen to see a new entrant in the market. Stuart Mackinnon, spokesman for the Federation of Small Businesses in Scotland, says RBS and Lloyds currently have about three-quarters of the banking market for small enterprises, and that is only slowly starting to change.
Virgin has made it clear that although it does eventually intend to sell business products, it won’t be entering the market until it has fully established itself in the retail market. But it will need more than 75 branches to make a real difference.
Virgin is prepared to play a long-term game. This week’s deal was four years in the making – Gadhia and her backer Sir Richard Branson initially tried to buy Northern Rock in 2007 as it collapsed at the start of the financial crisis, but were denied when it was nationalised.
Their determination to pursue the purchase for four years, and to risk entering a sector which is still facing serious challenges from the ongoing sovereign debt crisis, shows the strength of their ambition to create an alternative to the established banks.
They hope to use Virgin’s established branding and focus on customer service to emulate what Branson did in the airline industry, where he made the former national carriers look old-fashioned and out of touch with their clients while establishing his brand as a trendy alternative.
Gadhia says Branson’s iconic status in the business community will be used to market Virgin’s business banking offering, which she says is “on the horizon”.
“I really believe that the combination of Virgin and Northern Rock together will create a significant competitor. It won’t be enormous to start with, it won’t be as big as the four biggest banks, but it gives us a platform by adding our credit cards and investment products, and Northern Rock’s mortgage, savings and current accounts – our three million customers and their one million customers,” she says.
The combined bank’s next step will be to prove to the regulators, customers and the markets that it can provide a safe and attractive offering. It then plans to access growth funds through a stock market flotation, perhaps as soon as 2014.
Gadhia insists there are no specific market share targets or plans to poach business from any particular competitors. Instead the bank is concentrating on building up its long-term customers.
In the medium term, she expects to win around 5 per cent of the UK banking market, and says that will “get us to a place that the big banks can’t ignore”.
But Virgin Money’s plans to grow and challenge the big banks may not be as beneficial to Scotland as had once been hoped. As part of the deal it cut with the UK government, its principle headquarters will move to Northern Rock’s home in Newcastle.
Although it says none of the functions it carries out at Edinburgh will move, any future growth in staff numbers will likely be split between the two cities.
The two businesses operate in separate fields with little overlap, so Edinburgh’s growth prospects will be limited to Virgin’s original credit card and investment products.
Gadhia herself will remain in the Scottish capital, which she has made her home, but expects to spend “a couple of days in Newcastle and one in London” every week.