July 13, 2012 6:43 pm

‘Challengers needed’ for big five banks

Northern Rock & Virgin Money©REX

Campaigners have called for more “challenger” banks to rival the dominance of the biggest high street banks and provide consumers with more choice – but analysts have warned that this will not necessarily result in better product rates.

This week, Ed Miliband, the leader of the Labour party, said the UK’s largest high street banks should be forced to sell 1,000 branches to boost competition.

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Building societies and small banks have reported a rise in new customer applications in recent weeks following news of Barclays’ interest rate rigging scandal and payment problems at Royal Bank of Scotland.

But new entrants to the banking sector have struggled to make an impact since the financial crisis, held back by the difficult economic environment and heavy regulation.

Between them the five largest banks: HSBC, Barclays, Royal Bank of Scotland, Santander and Lloyds, still hold 85 per cent of all personal current accounts.

Consumer experts argue that while competition from new banks is positive, it will take time to make a difference. “New players still have to build sustainable businesses,” said Kevin Mountford, head of banking at moneysupermarket.com. “They can win customers through service and convenience but these will only scratch the surface when it comes to stealing customers from the big banks.”

FT Money looks at some of the main contenders looking to take advantage of consumer dissatisfaction with the big high street banks.

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Asda Money

The supermarket revamped its limited range of financial services this week, rebranding its financial offerings as Asda Money.

While Asda says it has no plans to offer a full banking service, it has launched a new reward credit card that pays back one per cent on everything customers spend on in-store shopping and fuel. It also offers 0.5 per cent cashback on purchases made elsewhere. The card has no fee and charges 14.9 per cent APR.

In addition to its credit card, Asda Money offers foreign currency and a range of insurance policies, which it promotes across its network of UK stores.

The retailer does not offer its own range of insurance policies and loans, but instead works with different financial service providers such as MasterCard and Creation. According to consumer group Which? Asda scores relatively poorly on customer satisfaction, with some customers unhappy at how the supermarket deals with complaints.

Best product: Asda Money Credit Card: 1 per cent cashback on Asda shopping

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Tesco Bank

The UK’s largest supermarket chain has offered a small range of financial products for more than a decade, but stepped up its bid to compete with banks in 2008 when it applied for its own banking licence and bought out its old partner Royal Bank of Scotland.

Tesco is now seen as one of the main contenders to challenge the dominance of the main high street banks. “Supermarkets are attractive by their flexibility and access, and the majority of their rates already appear in our best-buy tables,” said Charlotte Nelson of research firm Moneyfacts.

About 6.5m customers use Tesco Bank, which promotes low-cost deals for personal loans, credit cards and insurance, along with savings products. But the bank’s anticipated move to become a full-service bank, providing mortgages and current accounts, has been delayed until 2013 after computer problems locked thousands of customers out of their savings accounts.

Best product: Tesco Bank ClubCard CreditCard: 0 per cent on purchases

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Sainsbury’s Finance

Sainsbury’s offers the lowest rate for personal loans anywhere on the market, charging borrowers 5.9 per cent for sums between £7,500 and £15,000.

The price war on personal loans between Sainsbury’s and Derbyshire Building Society has pushed personal loan repayment rates down to their lowest levels since 2006. But to be eligible for the loan, customers must first sign up for a Nectar card, the points reward system used by the supermarket.

Customers can then earn Nectar points on all Sainsbury’s finance products, which can be used for discounts on their shopping or flight purchases. By linking finance products to the Nectar scheme, Sainsbury’s aims to encourage shoppers to take out insurance or loans with its financial arm.

Like Asda, Sainsbury’s works with financial providers to offer loans and insurance products. In addition to loans it offers a competitive savings account paying 2.8 per cent on deposits held in a tax-efficient Isa and a credit card which charges 0 per cent interest for 12 months.

Best product: Personal loan: 5.9 per cent

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Metro Bank

The self-proclaimed first new high street bank for 100 years opened with a flourish in 2010, claiming it would compete on customer service, not price.

The bank, which now has around 80,000 customers, says it wants a “banking revolution” that encourages disillusioned customers to get to know their bank manager and have a personal relationship with their branch.

There are 12 branches of Metro Bank, which are open seven days a week, and plans to open more across the south east of England. But investing in new branches has come at a price – pushing up the bank’s pre-tax losses by more than 40 per cent last year compared to the previous year.

At the end of 2011 it emerged that Metro Bank had only provided 100 mortgages, but the bank says that since the revelation of the Libor scandal there has been a noticeable increase in calls from prospective new clients, forcing it to employ more call-centre staff.

Along with a range of current accounts, savings products and loans, Metro Bank recently signed an agreement with MasterCard to offer debit cards to its current account customers, and has started to offer residential mortgages via brokers.

Best product: One Year Fixed Rate Cash Isa: 3.25 per cent

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M&S Bank

Marks & Spencer will open a new bank branch in its flagship London store this summer, and has plans for 50 more branches inside a network of its stores over the next two years. The branches will be open for longer than other banks and will include personal touches such as M&S furniture.

The retailer also has plans to start offering current accounts in the autumn, adding to its existing range of credit cards, personal loans and savings accounts.

M&S Money is already known for its credit cards, which often feature at the top end of the best buy tables. Customers can take out a credit card charging 15.9 per cent with a 0 per cent charge on purchases for the first 15 months, one of the longest offers available. Savers can earn 3 per cent interest on deposits of more than £100 in the bank’s easy access cash Isa.

The bank is run in collaboration with HSBC, which will be developing future products.

Best product: One Year Fixed Rate Savings Option Cash Isa – 3.25 per cent

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Virgin Money

Virgin Money opened its first high street “store” this week in Guildford, Surrey, boasting iPads and free wifi. The bank, which is owned by Sir Richard Branson, has acquired 75 bank branches from Northern Rock which will be rebranded, along with further stores that may be opened in railway stations operated by Virgin.

In 2011 Virgin Money revealed its new concept lounges in Norwich, Edinburgh and Manchester which offered an idea of the company’s plans for its high street bank.

Later this year Virgin Money, which like Tesco Bank has its own banking licence, will launch its current account, which it says will be fully transparent and will include no hidden fees. Although details of the current account have not yet been released, the account is likely to carry a small monthly account or upfront fees for transactions.

So far Virgin Money has about 3m customers across its credit card, insurance, investment and pension products range and promotes its products as simple and competitive.

Best product: Easy access cash Isa: 2.85 per cent

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The Co-operative Bank

Labour leader Ed Miliband chose to make his speech on bank reform at the Co-operative Bank for a reason. The ethical, Manchester-based business is poised to expand and is tipped to become a credible alternative to the big banks.

This week the Financial Times revealed that the Co-op was close to agreeing terms with Lloyds Banking Group to buy 630 of its branches. If the deal goes through, the bank will more than double its size and will have a network of 1,000 high street bank branches across the country. The deal would probably take until the end of 2013 to complete.

The Co-op has one of the most competitive easy-access and fixed-rate savings accounts available on the market for savers with at least £1,000 to deposit, and offers a current account with a fee-free overdraft of up to £200.

The mutual’s chief executive claims the Co-op is driven by sustainability, not short-term profits, and the bank has benefited from being seen as an alternative choice for customers who want to switch their money from the big banks.


Best product: One-Year Fixed-Term Deposit: 3.5 per cent

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Aldermore

Savers can find competitive interest rates on deposits from Aldermore, which was set up in 2009 and now has retail deposits of about £1.5bn. The bank’s fixed rate bonds and notice accounts frequently appear in best-buy tables and savers who want to make use of their cash Isa allowance can earn 3.15 per cent in the bank’s 60 day notice cash Isa. The bank does not yet offer current accounts.

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Handelsbanken

Handelsbanken has retail current accounts, along with savings accounts, mortgages and loans, but it does not advertise a standard rate for its products. Instead, each of the Swedish bank’s branches in the UK acts like a small business and branch managers are able to set prices on an individual basis.

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Credit unions

Credit unions are non-profit financial organisations set up by groups who have something in common, such as an employer or hometown, and can offer competitive loan and savings rates to members. Glasgow Credit Union, for example, offers personal loans at 7.9 per cent. Around 1m people in the UK already save or borrow with a credit union and the government has recently relaxed membership rules in the hope that more individuals will make use of them.

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