In my Money Week column this week I've been discussing why Britain needs more banks. Here's a taster....
We may be used to Virgin planes, trains, health clubs, and the dozens of other ventures that the serial entrepreneur Richard Branson has launched over the years. But a Virgin Bank? Thanks to a £100 million investment by the American billionaire Wilbur Ross, we may end up as familiar with Virgin banks on the high street as we are with Barclays, Lloyds and HSBC.
It would be easy to portray that as a brave incursion into a toughly competitive market. No doubt that is the way Virgin formidable PR team will be spinning it if the new bank does get off the ground.
And yet, in truth, it is more interesting to look at it the other way around. What is striking is not that someone is finally attempting to launch a new bank, but that so few people have done so. Eighteen months after the credit crunch caused the near collapse of the British banking system, the old players are still firmly in control of the industry. And yet, these companies are widely disliked, distrusted, and they sell poorly designed products at rip-off prices. In any normal industry, they’d have been blown out of the water by dozens of entrepreneurs.
The fact they haven’t been suggests banking is still an over-protected oligopoly, with too many barriers too entry. Until that changes, we aren’t going to get a safer, better value financial system.
True, there is plenty of interest in launching new banks in the UK.
Virgin has already made tentative moves, buying one small bank to acquire a license. The money million from Wilbur Ross is earmarked for a bid for 318 Royal Bank of Scotland branches which are due to sold off: if successful, that will give it an immediate presence in the market.
Sandy Chen, a former Panmure Gordon analyst, had put together plans for a new bank called Walton & Co. Vernon Hill, another US entrepreneur, is launching a new venture called Metro Bank: it plans to open branches in South Kensington and London later this year, with plans for a network concentrated in the South-East of England. And, somewhat inevitably, Tesco is sniffing around the market, with plans to turn its existing financial services arm into a full-scale bank offering current accounts alongside the dog food and bananas.
They are, however, are fairly small-scale. Their impact on the mass market is likely to be limited. And yet, there can be few industries as wide open to new players as British banking. It isn’t hard to think of reasons why this should be a great time to launch a new bank.
For starters, the banks are widely disliked. They took crazy risks, went broke, got us all to bail them out, then went straight back to paying themselves vast bonuses. Even estate agents are more popular than bankers right now. Parking wardens could probably out-poll them. If people could punish the banks by switching their business elsewhere, then they surely would.
Next, their recklessness in the run up to the credit crunch has left many people wondering if their bank is really that safe. Two years ago, most people hardly gave a second thought to whether their money was safe with one of the High Street names. Now they are nervous of leaving big sums on deposit. They have blown most of the trust they once had. An airline that did that would expect to be in trouble: there is no reason why a bank should be any different.
Finally, the products were never that great anyway, but in the last two years they have got even worse. The banks have been busy repairing their battered balance sheets, and they have been doing so at the expense of the customer. Interest rates are at a record low of 0.5. But can you get a mortgage at that rate? Or a loan for your company. Forget it. In reality, they banks have been widening the spread between what they pay their depositors and what they charge for loans. It is a bad deal for both savers and borrowers.
In short, these are unpopular companies, that nobody trusts, offering a poor value stuff that often doesn’t do what it’s meant to – but it is still an essential product that everyone needs. If that isn’t an open goal for an entrepreneur, it is hard to know what is.
In a normal, properly functioning free market, you’d expect to see lots of new players getting into the business. In airlines, Ryanair blew up the old, established carrier. In autos, first the Japanese and now the Koreans took huge chunks of the market from the old European and American giants. Apple has just taken Nokia and Motorola apart in the mobile phone business. In most industries, old established players are constantly getting challenged by new entrants. Rubbish companies get replaced by better ones. That’s how capitalism works. So why not in banking?
Of course, there are some barriers to entry. It’s a lot of bother to change your bank account. There is a certain amount of inertia on the part of the consumer. It’s hard work to get people to feel safe putting money into a bank they have never heard of.
Even so, it is hard to escape the conclusion that this is still too difficult an industry to get into. The obstacle of acquiring a banking license, the burden of regulation, and the way that payment systems between the banks are organised, all mean it is hard for new players to get a toe-hold in the market. And it’s getting harder. Regulators are so nervous of a bank going under, they are making it tougher and tougher to break into the market.
In the wake of the credit crunch we heard a lot about how the system of financial regulation should be reformed. And yet, in reality, there are very few economic problems that can’t be fixed with a healthy blast of competition.
What the government and the regulators should be doing is making it as easy as possible for new players to get into the industry. Not just Virgin and Metro and Tesco: there should be dozen of new banks, all finding their own space in the marketplace. Only diversity and competition will make the system work better. And if there is one thing the regulators should be focussing on for the next ten years, it should be that.