MY MORTGAGE PACKAGE expires by yearend, and as I’ve been shopping around for a new deal, I thought I’d give Virgin Money a try. To find out more about its financial products, I decided to visit its newly opened outlet in Norwich’s bustling city centre retail area.
Walking through its glass doors, I was intrigued by its swanky interior, all done up in red and black with cosy sofas and armchairs, a coffee bar and a baby grand piano in one corner. It looked more like the priority banking lounges I am used to in Asia rather than a typical British bank branch and, in fact, it wasn’t one, at least not just yet.
This is one of four Virgin Money “customer experience” lounges that have recently opened throughout the UK (others are in Edinburgh, London and Manchester) as the online bank’s first physical presence on the High Street. As I discovered on my recent visit, these lounges are meant as relaxation spaces for Virgin Money’s existing customers, and the staff were unable to help me with mortgage information. Still, I was offered a very nice cup of tea and a phone to call the bank’s mortgage officers.
Come January, though, some of these lounges will be turned into bank “stores” that offer financial services and transactions, when Virgin Money’s £747 million ($1.5 billion) takeover of nationalised bank Northern Rock is expected to be completed. The much-anticipated deal — Virgin Money’s second attempt to purchase the troubled mortgage and savings bank after a failed bid in 2008 — will be the culmination of charismatic entrepreneur Sir Richard Branson’s ambitious plans to play in the big league of High Street retail banking.
Few may be aware that Branson’s foray into financial services began in Norwich, when Virgin Direct was set up in 1995 to sell pension equity plans. It grew over the years into an online financial services company offering personal loans, insurance and award-winning credit cards, but it was not until January 2010 that Virgin Money finally obtained a much-coveted banking licence, with its acquisition of regional bank Church House Trust, through which it now offers mortgages and deposits. Seeking further growth, Virgin Money made a first-round bid for 632 branches put up for sale by Lloyds Banking Group earlier this year, but then decided to focus on its bid for Northern Rock.
The current deal will see Virgin Money taking over Northern Rock’s 75 branches. Branson has said he intends for Virgin Money to “shake up” British banking by bringing in fresh ideas and looking at things differently. Indeed, when asked how different Virgin Money would be from the market’s incumbents, the enthusiastic staff member I met at the Virgin Money lounge said it planned to engage directly with its customers (through the lounges/stores) and listen to them to find out what their needs are.
In that respect, Virgin Money is the latest in a string of new banking ventures looking to take advantage of consumers’ dissatisfaction with high-street banks since the financial crisis. Banks such as Metro Bank, Aldermore and Shawbrook, which opened for business in October, have positioned themselves as a “breath of fresh air”, going back to traditional banking models that focus on deposits and lending (no wholesale funding or toxic assets) and on building customer relationships and meeting their needs.
These new players bring much-needed competition to the industry, something that the government’s Independent Commission on Banking has repeatedly called for. Still, taking on the Big Four banks — Royal Bank of Scotland, Lloyds TSB, HSBC and Barclays, which reportedly hold nearly 90% of market share — is a huge challenge.
Metro Bank opened to much fanfare in July 2010 as the first new High Street bank in more than a century, offering branch banking seven days a week, instant issue of bank cards, and facilities for customers’ pets. The fledgling bank, which has nine branches throughout the country, said in November that it now has more than 40,000 savings and current accounts, but the Financial Times reported that the bank had issued only 100 mortgages in the past 15 months.
Aldermore, which operates mainly through the Internet, telephone and brokers, has fared better. It broke even on a monthly basis for the first time in July, and announced last week that it had secured 50,000 savings accounts, with more than £1 billion in deposits, and lent £371 million to nearly 3,000 British homeowners after two years in operation. Still, the £623 million that Aldermore has lent to small and medium-sized enterprises is a drop in the ocean compared with the £76 billion that the UK’s five biggest banks are reportedly looking to lend to SMEs this year.
All eyes are now on Virgin Money to become a serious challenger to the incumbent banks. The Daily Telegraph’s Damian Reece expects Branson to inject innovation into UK banking and force others to react, while admitting that Virgin Money, with its 75 branches (representing about one-tenth of the size of the Big Four) is unlikely to make a “huge dent” in the business of the industry giants.
Will Branson bring much-needed transformation to the UK banking industry? After all, this is the man whose innovation in airlines (Virgin Atlantic), telcos (Virgin Mobile) and destination shopping (Virgin Megastores) challenged existing industry and consumer mindsets and changed markets forever.
I, for one, find the Virgin Money lounges a welcome addition to the High Street, and even if sceptics are questioning whether glamorous lounges are what the UK banking industry really needs, I will be watching closely for Branson’s next move.
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