RBS computer fiasco a gift for UK's new banks
* Challenger banks picking up trade from RBS IT glitch
* New banks focusing on enhanced customer service
* Face challenge to expand and be profitable
By Matt Scuffham and Kylie MacLellan
LONDON, June 29 (Reuters) - The software debacle that caused chaos for millions of Royal Bank of Scotland customers is a gift for new arrivals such as Metro Bank and Aldermore, aiming to grab business from Britain's established but unpopular lenders.
Last week's fiasco, which led to media reports of house purchases falling through and workers going unpaid, was followed this week by an interest-rate rigging scandal that hammered Barclays and could spread to others including RBS.
These public relations disasters have added to the already poor perception of Britain's dominant high street banks - Barclays, HSBC, Lloyds, RBS and Santander UK - a situation that new competitors are hoping to exploit.
Although a fraction of the size of the incumbents, challengers such as Metro Bank, Virgin Money and Aldermore are looking to pick up customers unhappy with the service they're getting or who have been shunned by the bigger players as they focus on shrinking their balance sheets and building up capital reserves to meet new regulations.
For years, Britain's banking system has been dominated by a handful of large lenders. But after taxpayers had to bail out Lloyds and RBS during the 2008 global financial crisis, the government decided to stimulate competition.
Consumers have typically been reluctant to move banks because they think it will be difficult. The 2012 World Retail Banking Report from Capgemini found that, although 40 percent of customers were unsure if they would stay with their main bank in the long term, only 9 percent planned to switch in the next six months.
Later this year, the government will launch an initiative to make it easier and faster to switch current accounts.
Both Metro and Aldermore hope for a future where British retail banking is dominated by a number of medium-sized, more narrowly focused operators competing with slimmed down versions of the current giants.
"I would like to see in the next five to ten years a scene in the UK where, instead of having four or five big banks, you've got a dozen medium sized banks none of which are too big to fail in their own right," said Aldermore founder Philip Monks.
Though keen not to be seen to be benefiting from the misery endured by customers of RBS and its NatWest unit, Metro Bank's Chairman and Co-founder Anthony Thomson told Reuters it presented a chance to pick up disgruntled account holders.
"Anything which causes customer dissatisfaction with their existing banks provides an opportunity for us," Thomson said in an interview at the bank's flagship branch in Holborn, central London. "It's just another example of where customers have felt that the bank is not meeting their needs and they're starting to look elsewhere."
Staff at the branch said several RBS customers had enquired about switching since the bank suffered a computer systems meltdown last week preventing it from processing payments for individuals and businesses.
LIKE A PRISON
The challenger banks have looked to differentiate themselves by offering a more personal touch, although maintaining this as they grow could become both more difficult and costly.
"A new financial firm typically does have to offer things that the incumbents don't if they want to pick up a reasonable amount of business," said Phil Molyneux, Professor of banking and finance at Bangor University.
Metro, the first new high street bank in Britain for over a hundred years when it opened in 2010, markets itself on being open every day and for longer hours than traditional high street names. It also makes it easier for customers to switch by giving them their new bank cards on the day they open an account.
"I've already recommended it to five colleagues," fast food shop owner Asif Riaz, 31, told Reuters. "It's the convenience that they like, the long hours and opening at weekends".
Riaz said he liked the look of the Holborn branch, whose glass windows and high ceilings contrasted with the relatively dowdy appearance of a NatWest branch across the road.
"They don't look like the old style banks which almost feel like a prison," he said.
Aldermore, set up by former Barclays banker Monks with private equity backing in 2009, has adopted an entirely different model. It has no branches and doesn't offer current accounts, instead focusing on savings products and lending to small businesses and homeowners.
"We don't have any desire to open branches. We have nine regional offices. The pleasure of being a banker is going out and visiting your customers rather than them trudging into a city centre to come and see you," Monks said.
Unhampered by the cost of running branches, Aldermore broke even in July 2011. Metro Bank is still lossmaking.
"It is harder in the short run to be profitable because you have got to pick up business," said Molyneux.
TIME AND EFFORT
The process of setting up a new bank is arduous. Newcomers must convince Britain's financial regulator, the Financial Services Authority, they have the necessary capital, expertise and infrastructure.
"The FSA quite rightly has its focus on the safety of depositors' money. We take hard earned deposits and lend them out to borrowers," Monks said.
Another challenge facing newcomers is from more lightly regulated lenders. Pay-day firms such as Wonga, which offers short-term business loans, and peer-to-peer lenders which allow members of the public to lend directly to small firms have become increasingly common.
"I think there will be non-banks that will eat away at the overall banking proposition," said Metro's Thomson.
Metro Bank, whose investors include fund management company Fidelity and property investors the Reuben brothers, plans to open nine more branches in London this year to bring it to a total of 20 and has ambitions to have 200 in greater London. The bank raised 126 million pounds this month to fund expansion.
Other new ventures have found it difficult to a get a foothold in the sector. NBNK, set up by former Lloyd's of London insurance head Peter Levene and run by former Barclays and Northern Rock executive Gary Hoffman threw in the towel after failing in a bid to buy 630 branches being sold by Lloyds.
The Lloyds branches look set to be purchased by the Co-operative Group, creating a medium-sized competitor into the market which will have about 7 percent of Britain's current account market.