RETAIL BANKING: ANY ROOM FOR NEW ENTRANTS? March 2014

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1 RETAIL BANKING: ANY ROOM FOR NEW ENTRANTS? March 2014 Written by: Arash Fatemian, Consultant, Emma Johnson, Managing Analyst, Sarosh Khan, Senior Analyst 1

2 INTRODUCTION & KEY TAKE-OUTS The aim of this white paper is to explore whether there is any room for new entrants in the U.K. retail banking sector by analysing the behaviour of recent entrants. Ed Miliband, leader of the Labour Party, recently announced that should his party win the 2015 UK General Election, they would look to open up the U.K. retail banking sector to new entrants in an attempt to break the dominant position held by established high street banks. If this were to happen, it would present an opportunity to new entrants and raises the question whether, given the dominant position held by high street banks, there is any room for new entrants to succeed and if so, how they ought to about exploiting such a position. Methodology White Space chose to focus on four recent entrants to the U.K. retail banking sector; Metro Bank, Handlesbanken, Aldermore Bank and TSB. These four were chosen as they have all entered the banking sector from a slightly different position; customer service focus, decentred decision making with branch managers having decision making power, B2B banking focus and being a new bank formed by an established high street bank, respectively. In addition to interviewing a number of market experts, company specific and industry reports from market commentators were used to build an overview of each bank. This approach is designed to access a broad range of views, as well as to gain deep insights into the unique selling points and success of each bank. The resulting commentary provides a snapshot of each new entrant to the U.K. retail banking sector, and explores the strategic questions those looking at the retail banking sector should be considering. Key Take-Outs There is room for new entrants, with differentiation being the key to growth recent entrants have been able to attract customers by focusing on areas that established banks have been perceived as neglecting Differentiation requires investment which can be costly and returns won t be immediate while differentiation can lead to growth, high implementation costs can mean entrants should not expect immediate returns New entrants formed out of existing banks may struggle differentiation requires investment in people, infrastructure and products to succeed, more than a simple name change In-branch convenience is potentially attractive established banks are perceived as having neglected inbranch convenience, at the expense of using branches to sell products Decentralised decision making is increasingly common-place decision making in the hands of local branch managers conveys the image of a local bank New entrants need not have a traditional branch network the lack of physical preference can result in more personal banking products, particularly valuable in B2B banking 2

3 METRO BANK Metro Bank s stores, covered floor to ceiling in mirrors with greeters on the doors, costing 2m each to build and launch, encapsulate the bank s philosophy as being the furthest thing possible from the traditional image of banks. A focus is placed on customer service and convenience, areas that high street banks have been perceived as neglecting. The 25 Stores are large, (~4000 square feet), with bowls of treats in-store for pets and free coin counting machines. Staff sit behind airport check-in style desks as opposed to as, is normally the case, behind a glass window. Where high street banks have been lamented for poor service, Metro Bank focuses on service as a means of attracting customers. The service-convenience focus has resulted in growth as the bank now has ~275,000 customer accounts, both personal and business, a 75% increase from the start of It now opens ~12,000 new accounts each month, an increase from the ~4,000 a month it was opening in Stores are open 362 days a year and earlier and later than high street branches. A drive thru branch, the only one of its kind in the country, means customers can carry out all of their banking needs without having to leave their cars. Once again, Metro Bank has sought to differentiate itself by trying to ensure customer convenience in banking in person, a commonly held bone of contention with high street banks. Metro Bank s USP is its focus on service and convenience. While other banks claim to focus on service, Metro Bank actually does and its stores demonstrate it. They are open on Sundays and longer than high street banks branches, letting customers bank when best for them. Stores are big and staff friendly and helpful, giving the impression of anything but a bank Journalist, ThisIsMoney.co.uk The service-convenience focus has resulted in growth as the bank now has ~275,000 customer accounts, both personal and business, a 75% increase from the start of It now opens ~12,000 new accounts each month, an increase from the ~4,000 a month it was opening in Despite strong growth, the bank is yet to make a profit, having made 34m in losses last year and ~ 100m since 2010, likely the result of the cost associated with stores. Metro Bank needs to establish which aspects of its service are most attractive to customers and focus on these; it cannot keep spending money like it has so far. I think the fact stores are open on Sundays and earlier and later than other banks, are most important to customers, ahead of greeters on doors or mirrors on walls. Scaling back on the look of stores and number of in-store staff, while using ATMs to offer the same services to customers, could be an option as it continues to grow. This approach would allow Metro Bank to continue to focus on customer convenience while reducing the costs associated with stores, driving profitability. Financial Features Editor, City A.M. 3

4 Metro Bank s customer service and convenience focus is coming at a heavy price, one which it may not be able to maintain if it is to be a long term alternative to high street banks. HANDELSBANKEN Handelsbanken has recently made headlines for its lack of bonuses and innovative employee reward scheme, Ocktogonen, based on outperforming competitor banks. It s also been raising eyebrows with its rapid expansion, opening a UK branch roughly every eight working days since Behind this rapid growth is a banking model very different from that of its UK competitors. The central tenant of Handelsbanken is its decentralised structure, where the branch is the bank and branch managers have a level of responsibility and decision making not seen elsewhere in retail banking. Their approach is also truly localised. They adopt what they call the church spire principle where customers live close enough to be seen from the local church spire. This juxtaposes the local rhetoric of other retail banks which are centralised at a national level. At the core of this local and decentralised structure is personalised customer service where each customer has an account manager at their local branch, and all the decisions on their finances are taken by the branch manager. This delivers a bespoke banking service for Handelsbanken s target wealthy customers. Handelsbanken has a decentralised banking approach which it is likely to maintain as it continues to grow. The fact that RBS has recently decided to place decision-making back into the hands of branch managers would suggest that it is an attractive approach that perhaps more banks will adopt, looking to move away from the traditional centred approach. Freelance Journalist These principles, combined with careful selection of customers have proved to be a successful mix for Handelsbanken, who reported a 57% increase in their operating profit (group profit) and had expanded to 161 UK branches by August Handelsbanken are providing a real challenge to the standard approach to retail banking and proving that there are alternatives to the high street banks. 4

5 ALDERMORE BANK Aldermore Bank has recently been labelled a Challenger Bank to those on the high street despite its lack of a traditional branch network; it has 11 regional offices with 500 staff across the country. Central to the bank has been the traditional banking model; using the deposits of savers as the basis of loans to SMEs and homeowners. The model has proven to be successful with Aldermore possessing ~145k accounts across business lines, with ~4,700 new accounts being opened each month. As of June 2013, the bank had turned over 45m, an increase of ~62% from the previous year. The bank recently announced that pre-tax profits rose from 1.5m to 22.4m, as of April Savers have been attracted to the bank by its clear and simple products. This is a far cry from the perception of established high street banks, many of whom have been seen as deliberately selling complicated products to customers. Simplicity of products along with a lack of a high street presence has meant it has avoided being seen in the same light as high street banks. Another element of the model has seen Aldermore lend to SMEs at a time when high street banks have been reluctant to. Rather than not lending, Aldermore has adopted the approach of visiting SMEs business premises, trying to immerse itself in its customer s needs, so as to provide the most appropriate product for the customer. This is possible because of the lack of a traditional branch network, avoiding unnecessary overheads, serving the bank well at both ends of its model. The lack of a branch network has worked well for Aldermore. I also think the traditional branch network model is outdated. Advances in technology mean that customers can now do their banking without having to set foot in a branch. As it looks to grow it will need more of a presence and I think what Barclays are doing with small stores in Asda stores could be ideal. It would allow Aldermore to have more of a presence in public, attracting more savers to the bank, while not incurring the expense of a branch network that I think is largely unnecessary Financial Features Editor, City A.M. Aldermore s lack of a traditional branch network has allowed it to employ the traditional banking model with success, proving an alternative to high street banks. 5

6 TSB TSB recently gained a great deal of attention as its marketing campaign proudly announced the creation of a different high street bank. TSB was back on the high street under the terms of the government bailout which saw Lloyds TSB split in two. TSB has positioned itself as being the high street bank for local communities. By focusing on local communities, TSB is trying to position itself as distinct from the other high street banks with its CEO promising a fundamentally different bank. As the bank was recently created, examining its growth is not possible. However there are questions as to the extent to which fundamental change, as has been promised, will actually occur. Central to its philosophy is that traditional banking model for the local community. Money saved with the bank will form the basis of lending to businesses in those same communities. As a result the more that is saved with the bank, the more that can be lent to businesses in the community, the better it will be for the entire community; a cyclical model for the benefit of all. I saw the recent marketing campaign by TSB and thought it was complete rubbish. It is trying to give the impression that it is reverting back to the model underpinning the business when it was created by the bank s owner Henry Duncan. It is trying to suggest that they are going to be for the best of local communities when in fact I think little will change. The IT infrastructure, people and products all require time and resources to change; it is not enough to simply hive off an element of an existing bank Freelance Journalist TSB is trying to position itself as an alternative on the high street. While it is too early to judge the extent to which this is really the case, first impressions would suggest that it is not much of an alternative. 6

7 CONCLUSION: DEVELOPING A RETAIL BANKING NEW MARKET ENTRY STRATEGY The retail banking sector in the U.K. is on the verge of being opened up, presenting opportunities for growth to new entrants. All new entrants need to ensure that they are able to differentiate themselves effectively from established high street banks, at the very least evaluate potential, and identify ways in which this could be achieved. We recommend focusing strategy development on the needs and behaviours of customers, fitted around internal capabilities. Key questions to ask include: 1) What customer segments do you want to appeal to? 2) What services and products do these customers value the most? 3) What in-branch and out of branch infrastructure can you develop that customers will value? 4) What are you going to focus on in an effort to try and differentiate yourself from existing banks? What do you want to be famous for Which Space do you want to Own? About White Space White Space is a market analysis consultancy, specialising in new market entry, proposition development support and customer experience optimisation. We have significant experience working in B2B and B2C markets, with clients in the financial services sector. White Space s multi-disciplinary approach enables us to draw on relevant experience from a broad range of industries. Our years of experience in financial services research and strategy provide a valuable viewpoint on some of the hot topics currently driving the sector. 7