While the collapse of the Co-op’s bid to buy hundreds of Lloyds bank branches is a setback for the banking landscape, I think there’s still a great opportunity for a better bank to emerge.
The pace of reform in Britain’s banking industry has been painfully slow. And it was dealt yet another set back when the Co-op announced it was pulling out of its agreement to buy the 632 branches which Lloyds is obliged to dispose of by November.
If the Co-op’s deal with Lloyds had come to fruition, it would have created a bank with a branch network just shy of 1,000 – and a business that held a 7% share of the current account market. Not only would this have transformed the Co-op into a serious challenger to the big five banks, it would also have created another powerhouse of a mutual on the high street.
The Co-op’s mutual ownership structure means that, like Nationwide Building Society, it’s owned by its customers. And as customers and owners are one and the same, there are no conflicting interests between the two.
A new challenger to the banks
The same, however, can’t be said for most of our big banks. Their biggest challenge is to find a way of meeting the insatiable demands of their shareholders for greater profits while still playing fair with their customers – a challenge they’ve largely failed to meet over the past decade.
But in spite of the collapse of this deal, there will still be a new challenger bank on the high street towards the end of this year. Lloyds’ 632 branches are already in the process of being hived off into a separate subsidiary, and by September they will be rebranded under the old TSB name (‘The bank that likes to say yes’ – remember them?).
Although it will begin as a wholly owned Lloyds subsidiary, it already has a separate management team headed by former Virgin Money chief executive Paul Pester. It will complete its separation from Lloyds when it is floated on the London Stock Exchange next year.
Pester and his team have a unique chance to build a bank from scratch. They can create a culture that genuinely puts customers first, as we’ve been calling for with our Better Banks campaign. At the same time, the team can set out a longer-term strategy to shareholders, distancing the bank from the short-termism that has dogged the rest of the industry.
Although there are plenty of new banking challengers emerging from the wings, TSB will have an enormous advantage by hitting the ground running with a significant market share. In a world where retail banking margins are much slimmer than they once were, scale is a crucial ingredient to a viable business.
The struggle for new banks
Other newcomers, such as Metro Bank (which has reported losses of £100m in the past three years), have been learning the hard way how expensive it can be to grow a bank one branch at a time, while resisting the temptation to squeeze money out of its customers.
So while it’s a great shame that the Co-op now looks unlikely to ever become a major player in the UK banking market, the collapse of its deal leaves an opportunity for a new private player to show that it is possible to please customers and shareholders at the same time.
Genuine competitive pressure from within the industry can only accelerate what has so far been very slow progress in reforming our banks.
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