Monday, 16 September 2013

Changes in UK Banking Sector. New challenger banks. SMEs. Foreign Banks in the UK. Bank on Dave Fishwick.Bank of England's Mark Carney and plastic bank notes.

Treasure trove, treasure chests and Aladdin's Cave come from a fairy tale world.where money was kept securely long ago.

Changes are afoot in the banking world, and change is sorely needed.  

The public is receptive and wants change in the banking sector after the 2008 world-wide financial crisis and recession.  The failure of Lehman Brothers in the US and UK banks like Northern Rock led to government bailouts here which added to the ever-mounting government debt.  Since 2009 there have been exorbitant pay-offs for bank bosses, outrageous customer charges, miss-selling of financial products, Libor and other scandals.  There are now only 47 building societies left compared with 481 in 1970, some of which were taken over by banks.

Competition regulations have led to the breakup of banks, and former banks TSB and others have started afresh.  Competition is coming from well-established foreign banks as well as from the new challenger banks, which are supposedly out to challenge the big four. 

Foreign banks are steadily building up customer bases in the UK: Santander UK is part of the Spanish Santander Group and is the largest bank in the Eurozone.  Handelsbanken from Sweden has 161 UK branches, Danish Danske Bank has 62 branches in Northern Ireland and the State Bank of India has seven in the UK; (it is the 29th most reputed company in the world according to Forbes in 2009). Ethical Dutch bank Triodos NV has been in the UK since 1995, with branches in Bristol, London and Edinburgh.  It acts according to specific Steiner anthroposophical principles and .lends to organic farming, environmental and renewable energy businesses, charities and social enterprises. 

Challenger banks offer a more personalised local service for deposits, loans, mortgages and other financial services.  The nomenclature 'challenger' is reminiscent of Challenger tanks, but these new challenger banks are treading carefully and have limited power. They specialise in SMEs for small firms wanting loans and savings accounts otherwise unavailable from the jittery big four and other banks.  Secure Trust, which floated on London’s AIM in 2011, Aldermore (2009), Metro Bank (2010), Shawbrook (2011), Burnley Savings and Loans (2011) and  Cambridge & Counties Bank (2012) are doing well.  Aldermore Bank won ‘Best Online Savings Account Provider’ and ‘Best Online Cash ISA Provider’ at this year’s Your Money awards.  Shawbrook has good relations with small business customers and is now profitable after making a loss in its first year.  Cambridge & Counties Bank proclaims it is the fastest growing challenger bank in the UK in a recent Press Release on 4 September, having made a profit in its first year of trading: it is on course to meet four year lending targets in just two years. Shawbrook, Aldermore, Metro Bank and Cambridge and Counties Bank all have banking licences, which means their customers’ savings are covered by the FSCS/Financial Services Compensation Scheme for £85,000.

Dave Fishwick of Burnley Savings and Loans endeared himself to the nation during the “Bank of Dave” programme on Channel Four.  He is still trying to obtain a banking licence despite lending £25,000 a week to local customers who have been unable to get credit elsewhere.  Dave guarantees customer deposits himself, and has a long waiting list. As he explained to City AM this February:

 “I NEVER wanted to be a banker, but back in 2008, my minibus company in Burnley had a problem.  My customers were coming to me for new buses, and needed finance to buy them – as they had done for 20 years.  As soon as the credit crunch hit, however, the banks suddenly stopped lending overnight.  So either I stopped selling minibuses or I had to start lending out my own money.  I chose the latter.  Everyone paid me back, proving there was nothing wrong with the British public, but I wanted to go further.  I realised there was a gap in the market and banking didn’t seem that difficult.  It just needed to be taken back to the old fashioned days, when the bank manager knew you and your family, and would even sign your passport application.  That’s why I started Burnley Savings and Loans but I faced another problem.  Due to the huge barriers to entry, only one bank has gained a retail license over the last 100 years – Metro Bank.  I’m not even allowed to call what I do a bank because of the way the regulation works.  The biggest hurdle was that, by deciding to start a community bank, I needed millions of pounds in reserve and would have had to spend more on licensing and infrastructure.  I was never going to have more than £4m in savings or out on loan, and my “bank” used to be a florist’s shop on Burnley high street.  It just didn’t make sense.  Regulation should fit the size of operation you’re opening.  All I needed was a 100 per cent guarantee to savers, and that’s exactly what we offer”.

Metro stores and projected store growth

Vernon Hill provides dogs in his stores with dog biscuits and water.
Customers get coffee , can use the lavatory
and are given a refund if they re-home pets from Battersea Cats and Dogs Home 

On 5 March 2010 Metro Bank became the UK’s first new high street bank in a hundred years, offering full banking services seven days a week in London and the south-east, together with the government-backed Enterprise Finance Guarantee (EFG).  It continues to expand and now has 20 stores with ambitious plans to have 200 by 2020.  Metro’s US founder and chairman Vernon Hill  had no end of difficulties in starting up a bank, as he explained to Matthew Wall of the  BBC in June of this year: "The big banks in the UK operate like a cartel.  They overcharge and under-serve.  Setting up a bank in the UK is a complicated, difficult and capital-intensive endeavour."  He told Tim Wallace of City A.M in January this year "It is famously difficult to get a new banking licence issued, as the new venture’s backers must prove they have enough capital before they can have the permission, but generally need the licence before they can attract the necessary capital”.  

This is a Catch-22 situation yet UK and EU regulations are even more stringent after the financial crash.  Vernon Hill was and is a billionaire with the necessary reserves and experience to start Metro up, yet in retrospect he wouldn’t do so again.

• In March 2013 Business Secretary Vince Cable announced government plans for a Business Bank in an update in March 2013 to the Business Bank Strategy.  The Business Bank plans to be operational before the next election. 

“The business bank is not just a response to the deep structural downturn the UK faces originating from the severe crisis in the banking system and the subsequent tightening of credit conditions for SMEs.  It is a core part of a new Industrial Strategy, the essence of which is long-term support for long-term investment and growth in the UK.  It is also into the Government’s ambitions to promote diversity and competition in the business finance markets.  The UK is now the only G8 country without an institution of this type and it is simply not acceptable for us to fall behind our competitors in this way”.

Mark Carney
• Since 1 July 2013 the Bank of England has had a new governor, Canadian Mark Carney.  He introduced plastic polymer notes as Governor of the Bank of Canada and supports the Bank of England plan to introduce them here.  (Canadians complained the notes got stuck in vending machines). The BOE is already canvassing public opinion before making a decision in December.  More than twenty countries, including Australia, Canada, Mexico, New Zealand, Fiji and Singapore already use polymer bank notes, which have more security features and are therefore harder to forge. Danske Bank in Northern Ireland has had a commemorative plastic fiver for some years.
Prototype ten pound note
which can go in a washing machine.
Current UK bank notes are made of cotton fibre.
• From 16 September 2013 a new Current Account Switch Service means account-holders at 33 UK bank and building societies can switch providers within a guaranteed seven working days, which should increase competition for current accounts, 77% of which are held by the big four banks:  

• To increase competition, the new Prudential Regulatory Authority has speeded up the application and vetting process for banking licences for smaller newcomer challenger banks, which are much readier to lend to small and medium enterprises/SMEs and start-ups than the big four.  New banks will be subject to lower liquidity regulations and will not have to hold as much capital in reserve as their existing rivals.   Challenger banks could open up within six months, with capital of just £5m, if they manage to fulfil the numerous reggulatory requirements within that time.  Home & Savings Bank (HSB) has been waiting to receive a banking licence for over two years, so hopefully it can benefit soon.

Challenger banks offering the top rates

Switching Incentive
Minimum Monthly Funding
In-Credit Rate (AER)
Authorised Overdraft Rate (TYPICAL EAR)
Danske Bank (UK) - Danske Choice
£100 - Conditions Apply
£100 interest free, 3.79% thereafter
Handelsbanken offer a tailored service therefore interest, fees and charges are all set dependent on a customers profile.
Metro Bank - Current Account
Smile - Current Account
12 months £500 interest free thereafter 18.9%
TSB - Classic Account
£1+ - 1.50%£1,000+2.00%£3,000 up to £5,000 -3.00%
up to £10 free. Monthly overdraft usage fee of £6 plus 19.94%

On 11.September 2013 published the  top rates offered  by challenger banks, two of which are the Scandinavian Danske Bank, based in Copenhagen and Handelsbanken, based in Sweden.  Smile, the internet bank, is proving popular and is part of the Co-operative Bank.  TSB has just come back into the fray as a challenger with a hefty advantage: 4.6 million former Lloyds' customers. 

Richard Branson’s Virgin Money and the Co-operative, Tesco, Sainsbury and M&S have burgeoning banking services.  M&S is starting to open banks in its stores  with dazzling incentives, and like Metro, their banks will be open for longer than normal hours.

Only time will tell if the regulators of the new Financial Conduct Authority and Prudential Regulatory Authority succeed in making it easier for new banks to get licences, but contenders will be up against European Union regulations too.  Banking can be a risky venture, current accounts cost money to run, and some banks are already charging for these.  Computers are a huge investment, glitches are common, and many banks do not have a centralised system. 

Irishman Paul Lynam, CEO of Secure Trust, is one of the few chief executives of a bank to have professional banking qualifications, and surely this aspect ought to be addressed for all employees in the banking sector.  He makes sure his employees are given time off to study..  

Vince Cable described the building societies' demutualisation as "one of the greatest acts of economic vandalism in modern times", resulting in commercial banks "abandoning locally based relationship banking in the decade before the recent financial crisis.”  Local authorities invest as much as £31 billion into banking and other investments, but could play their part and start up local banks for local ratepayers if only there were a viable way for them to do so.

Ethical banks have wonderful principles but do not figure in the league tables.  New challengers as yet do not have the resources or branches to be a challenge to the big four, but they are doing good work in lending to local SMEs. Tried and tested foreign banks are expanding in the UK. Banking regulators are adding necessary safeguards, the sector is diversifying and competition is slowly but surely increasing ..

Deloitte writers have produced excellent background reading:'Opportunity Knocks

Challenger Tank A30 from WWII.
Only 200 were built