Prospects for banking without the banks
Tesco Bank and Virgin Money
Despite the excitement surrounding their plans, new entrants such as Virgin Money and Tesco Bank face major challenges in building full-service retail banks according to a new report published by Payments Cards and Mobile.
Banking without the banks, written by marketing expert Professor Steve Worthington and industry consultant Peter Welch, examines the prospects for “non-banks” such as Virgin Money and Tesco Bank in the wake of the financial crisis that has damaged the reputation of the ‘traditional’ banks.
The report notes that Virgin and Tesco are not new to financial services. Both have been niche players for more than a decade, concentrating on a select range of products and operating through partnerships with existing banks. But they now plan to offer full-service retail banking, with both current accounts and mortgages being talked about. Tesco has bought out RBS’s stake in their financial services joint venture. Virgin Money is buying a small regional UK bank to expedite its acquisition of a banking licence and provide a platform for retail banking.
The report underlines the current small scale of Virgin’s and Tesco’s financial services operations. For example, were Tesco Bank a building society, it would rank only 10th between Principality and Newcastle. The only way for Virgin or Tesco to achieve scale quickly would be through a major acquisition. The planned sale of Northern Rock and divestments required by Lloyds and RBS may present opportunities. But the report underlines that acquisitions on this scale would carry significant integration risks for the non-banks.
The report sets out specific challenges that the likes of Virgin and Tesco face in building full-service banks:
- Despite all the moves to facilitate account switching, consumers remain instinctively relucant to change their current accounts.
- Further, banks remain reliant on opaque and unpopular means of generating revenue from their current accounts, namely high overdraft charges and little or no interest paid on credit balances. Can Virgin and Tesco offer current accounts profitably without relying on these and so threatening their reputational advantage?
- With much reduced access to wholesale funding following the crisis, Virgin and Tesco will need to build large deposit bases in order to offer mortgages. But they will face intense competition for retail deposits from existing banks and building societies.
- Virgin Money and Tesco Bank have relied heavily on credit cards and consumer credit to drive their growth. However, in the wake of the crisis, prospects for consumer credit are bleak. And it is not clear which other banking segment offers an equivalent “growth engine” to support their push into full-service banking.
The full report is priced at £950 / €1150 (plus VAT if applicable).
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