The sale of 632 Lloyds Banking group’s branches is intended to create a real ‘challenger’ in the personal account market
Time and again governments have promised to break the stranglehold of the “big four” banks – Lloyds Banking Group, Royal Bank of Scotland, HSBC and Barclays – in the all-important current account market. Restructuring the bailed-out banks is a key part of that plan. The sale of 632 Lloyds branches is intended to create a real “challenger” in the personal account market and the sale of 318 RBS branches (to Santander) is intended to kick-start competition in the business banking market as well.
Selling Northern Rock, nationalised in February 2008, to Sir Richard Branson’s Virgin Money is also designed to bring new competition to the high street. But it is not as easy as the politicians had hoped. In 2000 the “big four” had a market share of 74%. That huge dominance fell to 64% in 2008 when the Halifax arm of HBOS was at its most effective – but soared back to 77% after HBOS was rescued by Lloyds.
The current account market brings with it a big prize: £10bn in revenue for the big four in 2009. So where are the new competitors? And why is it taking so long to provide more choice?
The 632 branches being sold off by Lloyds are codenamed Verde but could also be known as TSB, as the long-standing brand name is part of the package. The branches have to be sold off by November 2013 to meet EU demands following the £20bn of state aid pumped into Lloyds as it rescued HBOS during the 2008 banking crisis. Lloyds selected Co-op as its preferred bidder because, with the new Verde branches slotted alongside its existing banking business, a real “challenger” bank could be created with 7% of current accounts and a 1,000-strong branch network. On their own the Verde estate would have 5% of current accounts – not quite big enough to be regarded as a major competitor.
There are fears, however, that the Co-op deal is in trouble. The City watchdog, which has to approve the sale, raised concerns that the Co-op’s parent group does not have the necessary banking expertise.
However, Lloyds could still float off the Verde business, perhaps reviving the TSB name in the process, if any bid cannot be agreed.
The Spanish bank’s takeover of Alliance & Leicester in July 2008 – just weeks before the banking crisis – propelled Santander to fifth place in the current account market behind the “big four” which successive governments have been keen to crack.
It agreed to buy 318 branches from bailed-out Royal Bank of Scotland in August 2010 but will not take control until the end of this year – or even early next year. The delays illustrate the complexities involved in carving up banks to enhance competition despite thousands of people deployed by both banks to try to make it happen.
The sale, which was stipulated by the EU as a result of the £45bn of taxpayer funds pumped into RBS, was central to claims that there would be enhanced competition on the high street.
In theory, there should: Santander’s share of small business customers will rise from 4% to 10% once the branches are formally split from RBS. The bank, run in the UK by Ana Botin, a member of the controlling family, will also receive more current account customers to add to its existing 9% share of this crucial market.
Stephen Hester, RBS chief executive, has explained that the sale is taking so long because “this a bunch of branches that had no separate IT, no separate data centres, no separate anything, so the carving of it into a business, and then the adaptation of all of that technology into something that turns into Santander, which is completely different technology”.
The shell company chaired by former Lloyd’s of London chairman Lord Levene was set up in August 2010 with a view to buying up an existing bank and getting a big foothold on the high street. It showed it meant business when Gary Hoffman, the chief executive of Northern Rock, was lured to run the upstart operation. So far, though, it has failed to a do a deal and some of its obvious targets have disappeared: Northern Rock was sold to Virgin Money while Lloyds Banking Group wants to sell its 632 branches to the Co-op.
Until that deal is actually clinched, it seems likely that NBNK will continue to hang on to the cash it has raised to finance an acquisition. It could also be a contender for the Clydesdale and Yorkshire Banks that owner National Australia Bank is considering selling off.
The potential sale of the two UK banks has been the subject of City speculation for a decade, because on their own they are not big enough to compete – a dilemma that any new entrant faces.
In March 2010, this became the first bank in more than 100 years to be granted a new licence. It now has 11 branches and aims to have 45, and to break even, by the middle of 2014.
The branches – or stores, as chairman Anthony Thompson insists they are called – cost £2m a time to fit out with black and white tile marble floors and huge windows to differentiate them from existing banks. Touches such as dog biscuits and children’s lollies are also intended to make clear to customers that service rather than price is the main proposition.
Founder Vernon Hill is a non-executive, and is a controversial figure, having been required to step down from a US bank he founded after regulators questioned its links with members of his family.
Two years on, Thompson is optimistic: some 1,500 customers are being added each week. But the total number to date is 63,500 – which looks low relative to the 10,000 or so per branch that established banks claim.
Thompson sums up the challenges facing banks trying to set up for the first time. “Given the government’s stated desire for more competition … one has got to ask why has there not been more new banks? There are some challenges in terms of launching banks. The Financial Services Authority are in quite in a difficult position in that they like the idea of more competition but they don’t want banks to fail. Although the definition of a free market is ease of entry and free exit – they don’t like the idea of a free exit.”
Sir Richard Branson’s financial services arm took control of Northern Rock on 1 January, buying the part of the business that was cleaned up and put up for sale by the government. The troubled mortgages and taxpayer loans injected into the Newcastle-based lender remain state-owned.
The deal was a coup for Virgin, which had wanted to buy Northern Rock before it was nationalised in February 2008. It gives the ambitious group a foothold on the high street that would have taken years to achieve from a standing start.
Despite having been created in December 1994 offering savings and pensions products, Virgin has not had a high street presence until now and only secured a banking licence, enabling the group to take deposits, after buying the tiny Yeovil-based Church House Trust bank two years ago.
Before acquiring Northern Rock, Virgin had intended to open 70 lounge-style branches – but so far has just three, where customers visit not to conduct business but to socialise. The Northern Rock deal brought 75 branches overnight. But, while customers can be offered mortgages, savings products, credit cards and insurance, those looking for a full service current account will be disappointed – they are unlikely to appear before 2013.
The one-time joint venture between the supermarket group and Royal Bank of Scotland has repeatedly failed to live up to former chief executive Sir Terry Leahy’s promises. While it has 6.5 million customers for insurance, credit card and savings products, there are no conventional, full-service bank accounts – despite promises made two years ago. Mortgages have similarly failed to materialise.
Tesco is another example of the IT problems associated with banking. Three years after buying out RBS’s 50% stake, it is only in the last few months that existing savings and insurance products are being completely transferred to new computer systems at Tesco Bank. Current accounts are not expected until next year at the earliest.
Mortages could some sooner. A spokesman said: “We’re close to completing the migration of our existing products on to our own platforms and, in parallel, continue to develop new products and services. We are in the final phase of testing our mortgage operations and developing the right launch products. We are currently finalising the details and timing of our launch.”
Current accounts, though, are still in “development phase”. The spokesman said: “Our launch timings are not yet confirmed but will be driven by delivering the right product … as well as the speed of implementation of new industry-wide systems to help customers switch current accounts.”