Financial services research – Lloyds, the Co-operative Bank, and LIBOR

Financial services research – Lloyds, the Co-operative Bank, and LIBOR

Back in December 2011, I wrote a piece about the potential impact of the Co-operative’s bid for a sizeable tranche of Lloyds Banking Group’s branch network. For a while, the bid looked like it was on pretty shaky ground.

In particular, there were questions from the regulators as to whether the Co-operative Group had sufficient banking expertise at board level. This came despite the fact that the financial crisis pretty conclusively shows that having banking expertise is no guarantee that you’re any good at running a bank. (In fact, some went further and suggested that the financial crisis proves that the last person you want in charge of a bank is someone with banking expertise. Given that Mintel has clients from across the retail banking world, that’s a suggestion that I couldn’t possibly comment upon).

Those objections, however, seem to have been overcome. It looks as if the sale is due to go through – and the feeling is that the Co-op is getting a very good price for those branches.

Back in December, it seemed to me that the timing was perfect for a remutualisation of the high street. Seven months on, the case is even more compelling. RBS’s high-profile technical glitch further undermined the banking sector’s reputation for competence.

And then the LIBOR story hit.

And it seems that for many the LIBOR scandal was the point at which dislike turned into outright disgust at the banking sector in general and, more specifically, at the perceived culture within the “too big to fail” banking bracket. This already seems to have worked to the benefit of the mutuals. Both the Nationwide and the Co-op claim to have benefitted from a sizeable increase in people looking to move accounts.

It’s that shift in sentiment that made me go back to the original article that I’d written on the potential sale – which I have included below . If the sale of those 632 branches seemed like an important move back in December, it seems even more relevant now.

(As an aside, I’m fascinated by the reaction to LIBOR. Although some people will have lost out, the direct consumer detriment is nothing compared to previous misdemeanours – PPI, bank charges, and the like. But it seems to me that the anger is far more pronounced. I’ve got few ideas why, but that’s probably a piece for another blog).

“The remutualisation of the high street” – 16th December 2011

“The Co-operative Bank’s bid for more than 600 Lloyds Banking Group branches would, at a stroke, create a brand capable of taking on the industry giants. The move becomes even more interesting when you consider the brand’s ability to leverage its ethical credentials and mutual status.”

What we have seen

• EU competition law means that Lloyds Banking Group has been forced to put more than 600 of its branches up for sale.
• The Co-operative Bank has won “preferred bidder status” for the sale.
• Mintel’s research shows that the Co-operative already has a relatively strong brand, despite the fact that it only controls around 2% of the current account market.
• Consumers recognise and, on the whole, believe its ethical credentials.

Back to the future?

Economic woes, inflation, youth unemployment, strikes, riots and a new album from Gary Numan: all we’d need is a return of puffball skirts and the 80s feel would be complete. In financial services, there is another story that harks back to a previous age – an age where the building societies went head-to-head with listed firms on the high street. The Co-operative Bank has been named as preferred bidder for the 632 branches that Lloyds Banking Group are selling as part of Project Verde.

It was in 1989 that Abbey National became the first of the big high street building societies to demutualise, and over the following decades, the building society sector shrank dramatically. Since then, even the once familiar brand names have started to disappear from the high street, thanks to consolidation and, more recently, the impact of the financial crisis. Abbey National has gone, the Woolwich is a Barclays sub-brand, and Northern Rock is soon to become Virgin Money.

The mutuals never totally disappeared, of course. Co-op is a sizeable institution by most standards, and the Nationwide is undoubtedly a top-tier player. But as research for Mintel’s Consumers and Retail Banking found, even the Nationwide is only named as their main current account provider by 7% of adults. In the same survey, just 2% said that they had their main account with the Co-op.

Making a stand

If the Project Verde deal does go ahead, though, it would represent a major recolonisation of the high street by the mutual sector. As part of the Project Verde agreement, LBG agreed to divest itself of a business that would have a current account market share of “at least 4.6%”. Add that to the Co-op’s existing share of the market, and the mutual would rival the Nationwide in the current account market.

The really interesting angle is the Co-op’s strong ethical credentials and the potential for creating a brand that stands apart from its high street rivals. The Nationwide makes much of its ownership structure, and there’s plenty of Mintel research that suggests that it does have an impact on consumer perception. In our Consumers and Retail Banking report, for example, Nationwide was the most trusted brand, as well as being among the most differentiated.

But the Co-op’s ethical approach has the potential to drive even greater differentiation. Not necessarily because of the values that the bank espouses: more just because its visible commitment to those values demonstrates that it stands for more than just profit maximisation.

The same brand research found that it was already the second most strongly differentiated brand, after Santander. This is impressive, given that it was competing against brands with a much stronger high street presence. With the additional scale that the Project Verde branches will provide, the brand’s visibility will increase massively.

Do ethics matter?

Mintel’s Consumer Attitudes Towards Green and Ethical Finance shows that only a minority of people will factor in a firm’s ethical policy when deciding where to bank. It’s a significant minority, true, but in itself an ethical policy isn’t enough to break into the top tier of current account providers.

Similarly, the Co-op consistently does well in customer satisfaction studies, but First Direct’s experience shows that you can have a great reputation for customer service and yet still remain relatively niche.

But what if you combine those two factors with the kind of branch network that Project Verde would give the Co-op? That strikes me as a starting point for a genuine challenge to the status quo.

What we think

• Despite the fact that most consumers rely on online banking, without a strong high street presence a bank is unlikely to be anything other than a niche player in today’s current account market.
• The Project Verde branches would give the Co-operative Bank the scale needed to mount a genuine assault on the current market leaders.
• Neither ethical credentials nor customer service are enough to convince many people to switch. But combined, they can give the Co-op some genuine differentiation.