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Bank carcases

The fate of previous new banks, says David Lascelles, is an ominous sign for the latest wave of entrants.

One of the exciting things about banking is the constant pace of change. Hardly a month goes by without some new product, some new institution popping up, some new crisis or triumph. But this is an illusion. Underneath, the structure of banking changes very little.

These thoughts came to mind as I studied the plans of new entrants to the business, such as Metro Bank (Magic money man hits town, FW November 2010) and Lord Levene’s ambition to re-engineer the branch network that Lloyds Banking Group is selling off (Number up for the Lloyds 600?, FW April 2011). As a financial journalist, I have covered many new banking ventures and the hopes attending them. I also wrote a CSFI report 10 years ago entitled Europe’s new banks that forecast the triumph of new-style banks – internet banks, non-bank banks, telephone banks – over the high street clearers. I interviewed dozens of “new banks”, many set up by retailers such as IKEA, Kaufhof, Tesco and Marks and Spencer, or insurance companies such as Axa, Legal & General, Skandia. I spent a day in Wolfsburg with VW Bank which, at the time, had 250,000 customers and assets of €2.6bn.

I also visited high-tech banks, including Ireland’s First-e, which was so new it did not even offer a telephone service. All communication was by email. The costs of First-e were so low that it expected to be profitable with only 15,000 customers, a sort of banking Ryanair.

It was hard not to be mightily impressed by this tremendous surge in innovation. Dozens of banks were sprouting up, unburdened by the legacies of the clearers, offering tremendous deals. I was struck by the fact that Egg, the largest of the new banks at the time, had built in only nine months a business the size of the Yorkshire Building Society, which had been in existence since 1885.

But did it amount to more than a hill of beans?

I have checked out many of the ventures that seemed so threatening at the time and have to conclude that the answer is no.

Mighty Egg was kicked from pillar to post by a succession of owners, of which the latest, Citigroup,  is selling Egg’s credit card accounts to Barclays. In 2004, Marks and Spencer sold its financial services arm to HSBC, but kept the brand and a share of the profits. IKEA and VW banks are still in business, though not exactly taking over the world. First-e, which impressed me the most at the time, is dead and gone. One of the few that seems to be thriving is Tesco, which recently announced plans to step up its banking and insurance businesses. Sainsbury’s Bank is also there, though more as a savings and loan bank than offering a full service.

But the fact is that the market today remains dominated by the same names as in 2000, the only changes (Santander, HBOS, etc.) resulting from merger and acquisition rather than new ventures. Structurally, the market looks much the same: a small number of very large banks with a few minnows nibbling at the side. The great majority of the British banking public have not lifted a finger to switch their accounts.

This is disappointing, but it needs to be qualified. It does not mean that the banking market resists innovation. One reason why start-ups fail is that the clearers have become quite good at pinching their ideas. There is no question that the shift to electronic banking was accelerated by incomers, and that product innovation was driven by outsiders, such as Virgin’s One Account. So they do have an impact.

What is depressing, though, is that the newcomers’ ability to cut costs and offer better terms – and focus their business by cherrypicking – does not guarantee them a share of what is clearly a very sticky market. And even though the number of newcomers implies that the entry barriers are not as high as people often claim they are, they are still too high to admit competition on a scale that would bring about real change.

What this means for Metro Bank and Lord Levene, I hesitate to say. I observe that Metro aims to provide a "traditional" service with lots of physical presence, helpful "local" people and convenient opening hours. The Levene bank would also be strong on the ground - more of a legacy than a new-tech bank. This is very different from 10 years ago when the emphasis was on high-tech virtual banking, and it may appeal to a market that is fed up with the big banks and the depersonalisation that goes with the modern banking model. But the success rate for new ventures is low, and I do not have the same feeling of excitement I had back then.

David Lascelles is senior fellow of the CSFI and former banking editor of the Financial Times