Virgin, Tesco … where’s the new bank?

So, we are finally seeing some new retail banks launched in Britain for the first time in, oh, living memory?

Sure, I can remember when Tesco and Virgin got into financial services, but they did so in partnership with Royal Bank of Scotland because they couldn’t get a banking licence.

Now, we have a sudden flush of new banks coming into the markets and, focusing upon Virgin and Tesco’s strategies as these are the major players trying to threaten traditional UK retail banks dominance, it’s interesting to see how the new competitive battleground will play out.

Virgin, for example, are taking a pragmatic me-too styled approach, buying a small bank – Church House Trust – to gain a UK banking licence and now looking to take over a good chunk of the near 1,000 branches that will be sold by RBS, Lloyds and Northern Rock stores. The bailed out banks being forced to sell over 300 and 600 branches respectively under EU competition rules, whilst Northern Rock was a target for Virgin all along.

What this means is that Virgin will emerge as the sixth largest UK retail bank, just behind Santander with 1,300 branches after the successful acquisitions of Abbey, Alliance & Leicester and Bradford & Bingley. This compares with the 3,000 branches across the Lloyds Banking Group, the largest in Britain; 2,000 for RBS; 1,700 with Barclays; and 1,400 for HSBC.

Or will they?

If you include Tesco and others in the mix, then the picture actually looks rather different by the end of next year:

UK Retail Banks with Branches
Expectations of market structure by end-2011

                                     Branches

The Post Office                12000
Lloyds Banking Group         2500
Tesco                                2300*
RBS                                   1600
Barclays                             1600
Santander                          1300
HSBC                                 1200
Virgin                                  700”
National Australia Group       300^
Co-operative Bank                300
Metro Bank                           20

* through the current store network, although the retailer is now opening a small number of ‘dedicated’ bank branches
“ assumes that Virgin buys a substantial branch network from the RBS and Lloyds sell-offs
^Yorkshire Bank, Clydesdale Bank and Northern Bank

Oh yes, the Post Office are in there for example. In December 2009, the UK Government encouraged the Post Office to offer full financial services, including full banking services. This is under review right now, with the Post Office’s main retailing opportunity will be in the masses and underbanked, rather than premium banking, due to the fact they are typically full of people buying stamps or getting pensions and other benefits paid.

And this list doesn’t even cover some other ‘financial’ players, such as Marks & Spencer, Sainsbury and some of the mobile carriers such as O2.

All in all, the composition of the UK retail banking sector will be radically different in a year or two, as is America’s and many of Europe’s retail sector. In fact, the only real barrier to dramatic change is that all of the above list of players needs a banking licence to offer services. If anyone could set up a bank and compete, the sector would be radically different.

Meanwhile, what really bugs me is that all of the banks discussed above are based upon traditional thinking, including Metro Bank. You see, they’re all based upon branches and branch-based banking.

Where’s the new bank without branches?

Where’s the next First Direct?

Where’s the solely mobile phone-based bank?

Answer: there isn’t one.

Therefore, even though the new entrants are here to shake up traditional banking, they’re doing that based upon targeting traditional bank thinking.

This is not to say that branches aren’t needed at all, a debate I’ve had here regularly.

Of course they are needed for sales, advice and service, and to withdraw funds when the banks future existence is in doubt.

But my question is whether Virgin and Tesco are focusing upon a small branch distribution structure for sale augmented and complemented by an amazing mobile and web enabled experience, or just creating another branch-based bank.

The former is the bank I want, rather than some rehashed old branch-based banking with bright colours and smiley people. But then maybe I’m not the target audience, being just one of the 30 million UK internet users who are comfortable shopping and banking online.

if you want to know more about the composition of the UK retail banking sector, it would do you no harm to get a copy of Peter Welch and Professor Steve Worthington’s new report: Banking without the Banks.  The report evaluates the competitive threat of Virgin and Tesco in depth.  

Get a copy over here http://www.paymentscardsandmobile.com/banking-without-banks.php