We may be used to Richard Branson’s Virgin planes, trains, and health clubs, but a Virgin Bank? Thanks to a £100m 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.
Yet what is striking is that 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. 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 that they haven’t been suggests banking is still an over-protected oligopoly, with too many barriers to entry.
There is certainly plenty of interest in launching new banks in Britain. The money from Wilbur Ross is earmarked for a bid for 318 Royal Bank of Scotland branches, which are due to be sold off: if successful, that will give it an immediate presence in the market. Meanwhile, Sandy Chen, a former Panmure Gordon analyst, has put together plans for a new bank called Walton & Co. Vernon Hill, another American entrepreneur, is launching a new venture called Metro Bank. It aims to open branches in South Kensington and London later this year, with plans for a network concentrated in the South-East of England.
Tesco too is sniffing around the market, with plans to turn its existing financial services arm into a full-scale bank offering current accounts alongside dog food and bananas. And finally, there’s the Post Office, which recently grabbed the headlines with its 10% deposit mortgage for first-time buyers and proposed move into mainstream banking.
The trouble is most of the new offerings are fairly small scale and 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 UK banking. This should be a great time to launch a new bank. For starters, 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, banks’ 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. Banks 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, the 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 a 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 the car market, the Japanese, and now the Koreans, have taken 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, rubbish companies get replaced by better ones. So why not in banking? Sure, there are some barriers to entry. It’s a lot of bother to change your account. And it’s hard work to get people to feel safe putting money into a bank they’ve 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 toehold in the market.
And it’s getting harder. Regulators are so nervous of a bank going under that they’re 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. 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. And not just Virgin and Metro and Tesco: there should be dozens of new banks, all finding their own space in the marketplace. Only diversity and competition will make the system work better. If there is one thing the regulators should be focusing on for the next ten years, it should be that.