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Battling with the banks: ready for prime time

chris skinnerAs traditional banks focus on balance sheet restructuring, increasing capital reserves, paying back stakeholders and dealing with all manner of governmental interference, is there a danger they could be taking their eye off the ball?

The credit crisis has locked down the lending ports of the banking ships. Even with government stimulating the economy through quantitative easing, the net UK mortgage lending book in May this year was at is weakest since early 2001 according to the British Bankers Association (BBA). The remortgage market is down over 60% and mortgage approvals overall were down almost 45% on the year before.

Meanwhile the latest Bank of England credit conditions survey shows that corporate credit is just starting to increase again after almost two years of contraction.

The expectation is that this will return us to a shadowy version of the heydays of the past. Lending will increase to allow corporate expansionism; and a relaxation on mortgage rules should stabilise the property freefall.

But this is not what is happening in reality.

Competition

The banking downturn has actually stimulated a whole new raft of competitors to step in and try to sweep up the hole left by the credit vacuum.

First, there are the strong retail distributors: Virgin and Tesco, who are trying to make gains on the back of the loss of trust in the traditional banks. It is a brand play focused on taking retail depositors away from existing high street names, as evidenced by the fact that they are building branch-based as well as electronic distribution channels.

The incumbent banks of Britain have suffered a horrendous two years and are now trying to get their houses back in order

Virgin made it clear that it had serious bank plans when it made a failed bid to take over Northern Rock and, more recently, announced it would be moving into the mortgage lending markets. Tesco is also interested in a nugget or two of the Rock, although its ambitions lie more with the expansion of the 2,000 retail stores into bank services. Initially Tesco will open 30 bank branches in these stores this year, building on the success of trials in Glasgow.

And they are not the only challengers.

There are also new banks – such as Metro Bank, a spin-off of Commerce Bank in the USA – which intend to open later this year, as well as those of local authorities like Essex Council’s Banking on Essex, which has been launched as a result of the major contraction in corporate lending in the banking markets and is looking to provide SME loans of up to £100,000 a time to stimulate business across the region.

The idea of such community-based banks is not unusual, and correlates with the rise of community-based currencies like the Lewes and Totnes pounds.

But wait, there’s more.

‘Social’ lending

Innovators were out there trying to change the game before all this happened. The leader of this charge was and still seems to be Zopa, the social lending website. Billing itself as an ‘eBay for loans’, Zopa matches people with money with people who want money, providing the risk management platform to spread risk and create social financial relationships. It offers people with money far better returns on their investments than the high street bank savings and deposits schemes.

Initially misunderstood, Zopa has been growing steadily since its launch in 2005. On its third birthday in March 2008 its blog claimed: “Since we launched in March 2005, £20m in unsecured personal loans have been arranged at Zopa in the UK.” Mmmmm … doesn’t seem like much does it? That’s about £6m a year. Small beer by comparison with the big banks.

But according to the The Financial Times in March this year, Zopa reported a 140% rise in lending year on year and saw a £15m leap in loans traded on its platform from March 2008 to March 2009, more than doubling its volumes.

Finally, not to be overlooked is another disrupter called Wonga, a site geared specifically to those who need money and need it fast. Typically, this is the sort of customer who is in a real fix and needs money for a couple of days to tide them over between paying their rent and the next pay cheque.

As Wonga does everything online instantly, it limits the first application to £200 then, which can increase over time if customers prove trustworthy. The loan is for a maximum of 30 days and no more, so it’s not a credit service but a ‘tide-me-over’ facility. With a £5:50 ($10) transmission fee and an interest rate of 1% per day (that’s an APR of 2,334%!), the cost of a one-month loan, including fees, works out to 36.7% – so it’s not advisable to keep a Wonga loan too long.

Even with all this, Wonga has raised £14m in new venture capital in June 2009, less than a year after launch, with a significant contribution from Balderton Capital, the company which backed it at inception in 2006.

So what does it all mean?

It shows that when credit is tight, all avenues will be reviewed.

And it means the incumbent banks of Britain have suffered a horrendous two years and are now trying to get their houses back in order. Credit has been so hard to come by of recent times, that it has spawned new competition, new business models and new ways of thinking about finance.

The issue therefore is how to compete when you are handcuffed to the past and still focused on survival.

There’s the rub, the challenge and the focus for banks for at least another year or two.


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Chris Skinner is an independent commentator on the financial markets; Chair of the European networking group, the Financial Services Club; Chief Executive of Balatro; and a co-founder of the website Shaping Tomorrow. He is well-known for his regular columns in a variety of media as well as his daily blog, which can be found at www.thefinanser.com. He is the author of several books including The Future of Banking, The Future of Finance after SEPA and The Future of Investing after MiFID.