* 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 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
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
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
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
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
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