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 moneysupermarket.com, 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.
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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An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.