Do we really need more banks?

The high street has undergone some visible changes since the credit crunch hit at the back end of 2007. Well-known retailers such as Woolworths and Borders have fallen victim to the subsequent recession, and boarded-up shops are now a familiar sight.

Behind the scenes, retail banks have been changing too. We've seen major banking groups join forces, building societies merge with former rivals, and collapsed banks taken under the taxpayer's benevolent wing.

These changes are transforming the face of the high street. In January, 1,000 Abbey and Bradford & Bingley branches were re-branded as Santander, their Spanish parent bank.

Alliance & Leicester's brand will also vanish from the high street when its 278 branches change name later this year. The re-brand will make Santander the fifth-largest bank in the UK.

Elsewhere, other changes are afoot. In January, Virgin Money took its first step towards becoming a retail bank with the purchase of Church House Trust, a small regional building society.

The credit card provider, which previously tried to buy Northern Rock ahead of its nationalisation, says it will start building up the business by focusing on savings and mortgages.

Richard Branson, founder of the Virgin group, said: "The Church House Trust business offers us a strong platform for growth. Virgin Money aims to bring simplicity to the UK banking market, which has traditionally been a complex sector."

Elsewhere, Northern Rock has been split into a 'good' and a 'bad' bank, with the former up for sale. Bailed-out Lloyds Banking Group and Royal Bank of Scotland have also been ordered to sell off chunks of their respective businesses. With Santander a favourite to buy the 318 RBS branches up for sale.

The break-up of these banks was originally expected to pave the way for more new entrants to the sector, with former Chancellor Alistair Darling saying that three new high street banks could be created over the next four years.

But if Santander is successful, its market share will increase from 3% to 8%, which is not exactly in the spirit of creating more choice for consumers. 

One new entrant to the market is Metro Bank, set up by an American entrepreneur, who is believed to have ambitions to launch as many as 200 branches across the country. Its first branch will open in Holborn, London on 29 July 2010.

Tesco is also expected to 'branch' out and become a fully fledged bank this year, and National Australia Bank – which already owns Yorkshire and Clydesdale banks – is believed to be interested in expanding its mini-empire.

What does this mean for consumers?

More banks on the high street is good news for customers, as heightened competition should result in better products being offered. For example, Virgin Money is expected to up the ante in the savings market as it looks to build up its brand and its deposit levels.

Kevin Mountford, head of banking at, said: "We've already seen Virgin Money play an aggressive role in the credit card market with its best-buy products, and we can expect it to do likewise across a broader set of banking products."

The launch should also prompt established banks into reviewing what they currently offer to customers; this might mean improving customer service levels, offering increased access to services such as mobile banking, and protecting people from fraud.

Rebuilding trust

In a poll we did earlier this year, 41% of you said you didn't trust either banks or building societies, with 54% saying you trust building societies more and 5% saying you trust banks more.

A similar survey by Which? found that 77% of us think banks need to regain customer trust following the credit crunch and the fallout from the bank charge test case.

While this will be no mean feat, banks are expected to put even more emphasis on customers. If they don't, they risk losing out to the new entrants and their promises of giving disgruntled consumers a better service. 

Peter Vicary-Smith, chief executive of Which?, said: "Consumers will welcome the prospect of more choice on the high street. There's a definite appetite for switching accounts if people feel they've been badly treated by their bank.

"New entrants to the market, offering genuinely competitive products, should spur other banks into working harder to keep their customers happy – which should result in better products and higher levels of service."

The inertia barrier

However, a recent report by independent market analyst Datamonitor claims that despite the surge of new entrants, the UK's top five banks will not lose their stranglehold on consumers.

Customer inertia is identified as the single biggest hurdle affecting new entrants, which won't be able to compete with established players.

Daoud Fakhri, author of the report, said: "New entrants such as Tesco and Virgin Money will hope to benefit from the 'halo effect', where a positive perception of a retailer's main activity feeds through to create a positive perception of its financial operations.

"But both businesses will be aware that this could work in reverse: if they launch before they are fully ready and then face difficulties, this could damage their reputation across all their business areas."

Historically, breaking into the banking sector has always been tough. Both Egg and Standard Life, which were launched during the past decade, offered a "new way of banking", with convenience as their unique selling point.

Despite being backed by established financial institutions, they failed to break consumer inertia and, as a result, have both been sold off by their original owners.

If you want to switch current account, but don't know where to start, find out here.

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Splitting up RBS is all well and good, but who is going to buy their English branches? It wasn't branch banking that caused the Banking crisis, it was greed in the banks' investment arms.
It appears that the government is happy for "our" high street banks to be bought by foreign banks, but that immediately means that their profits will go offshore too. For example, RBS used to be the UK's biggest corporate taxpayer. If their branches are sold to foreign banks, the UK Government will lose the tax income from the new owners profits.
RBS became a super efficient bank (or at least the retail banking arm did) by merging the central, behind the scenes, functions of Natwest & RBS. By splitting them up again, costs will rise and it's highly likely that branches will close because a prospective purchaser will only want the branches in the best locations. Who will benefit then? Not the ordinary customer who will see branch closures in many towns and also the end of "free banking" on current accounts.
Come on, open your eyes to what is going on Government, dont just sit back & let Brussels dictate to you - again.

An increase in competition in the banking sector can only be good for competition. An increase in the number of banks would cause downward pressure on bank charges and interest rates. It would be nice to see Virgin take a larger share as I'm sure they will have some fresh ideas for the sector.

I must agree with bates, for the consumer to get the best price and service there needs to be competition and competition is good for the economy.