Metro Bank - taking on the big bank monsters

MT FEATURE: With the reputations of the Big Four in tatters, banks like Metro and Handelsbanken offering proper customer service and local decision-making. Can they really make a killing out of current accounts?

by Andrew Saunders
Last Updated: 22 Oct 2014

At the bustling confluence of High Holborn and Southampton Row, between the bright lights of London's theatreland and the western extremities of the City, lies one of the rarer retail species to be seen on the high street. Occupying a prime corner site, with an expanse of plate glass worthy of a small department store and bold red, white and blue branding to match, it looks for all the world like an electronics discounter, or perhaps one of the brasher breeds of estate agent.

One of 12 such outlets dotted across the south-east, it is in fact the HQ branch of Metro Bank, the first new bank to be granted a licence to operate in the UK in over a century. The thematic distance from any of the Big Four (Lloyds, Barclays, RBS and HSBC) increases inside. Airy and furnished like a hotel lobby, the interior has no security screens between customers and counter staff. Drinking bowls and complimentary dog biscuits are laid on for pet-loving punters; but, for anyone used to 'banking as usual', even this singular quirk is eclipsed by the presence of plenty of cashiers - and no queues.

The similarity to a retail multiple is no coincidence, says Metro's chairman, Anthony Thompson. 'We are retailers, we have stores rather than branches. And, unlike the other banks, we actually want our customers to come in. The view of some other banks is that it is cheaper to serve customers by phone or online - their holy grail is their cost/income ratio, but you can't cost-cut your way to growth.'

In the parlance of our times, Metro is a 'challenger bank', shaking up the cosy banking oligopoly in which the five biggest operators (the Big Four plus Santander) account for 85% of current accounts held in the UK. Everyone, from Lord Vickers (he of the eponymous report into banking) and Lord Turner (chairman of the soon-to-be-defunct FSA) to Vince Cable, Ed Miliband and consumer groups like Which?, agrees that customers get a raw deal and that more competition in the banking sector is a Good Thing.

Nothing new there, but thanks to the endless stream of scandal, denial and old-fashioned cock-up emerging from the industry - PPI, Libor and the recent RBS computer outage, to name but three - Thompson reckons that increasing numbers of customers are pissed off enough to think about moving their bank accounts. In what is probably the last industry where customers-for-life are still a commonplace, this change of heart could be crucial.

'Apathy is our biggest challenge,' says Thompson, who has just announced his intention to step down at the end of the year. 'People think that all banks are terrible, so what's the point in switching? I feel strongly that profit should be a by-product of doing something well for your customers, but lots of banks have forgotten this and now just think of their customers as profit and loss figures. We think of them as individuals.'

The numbers of people switching accounts is on the rise, he says, from around 5% a year to nearer 10%. Some surveys suggest that as many as 40% of bank account holders would switch if they felt there was a worthwhile alternative.

Spending up to £2m fitting out a branch (twice the industry average), Metro isn't afraid to put its money where its mouth is, and Thompson says it's well spent. Ninety per cent of bank accounts in the UK are opened in 'a physical location', so you need branches, and why not make them as welcoming as possible?

Challenger: Metro chairman Anthony ThompsonThe same goes for staff: 'Our staff are fundamentally different,' he adds. 'They have no sales targets and none of their bonus is predicated on sales. They have customer satisfaction targets instead.' The fact that 84% of Metro's customers say they would recommend it to a friend is a direct result of this, he believes.

New accounts can be opened in 15 minutes flat, and there's a clever machine in each branch that 'prints' bank cards on demand. Lending decisions are also devolved to a local level, and branch managers have more autonomy. Thus, blanket diktats from head office summarily dumping good customers of long standing are avoided, and Thompson reckons Metro has picked up business as a result of at least one rival pulling out of the small restaurant sector, for example.

All the same, start-up costs have been heavy - losses widened by 40% in 2011 to £33.1m. Wouldn't it have been much cheaper, in this age of smartphones and an app for everything, to have gone for an online-only model? Thompson says not. 'It would have been quicker, cheaper - and less successful. People like to see a physical manifestation of their bank.'

Besides, it's not as if its shareholders have much cause for complaint so far. Metro is based on a model imported from the US - Commerce Bank - which generated a remarkable 25% compound annual growth rate for its investors. Metro itself has raised capital totalling £254m in three rounds at a steadily increasing share price since its launch in July 2010. It now has 100,000 account-holders - getting on for half of them are business customers, says Thompson - and is signing up new ones at the rate of 2,000 a week.

Commerce Bank founder Vernon Hill is Metro's vice chairman, and the bank is on target for an IPO in 2014. 'For us, it's about the value equation - we think people will stay with us and accept rates which are slightly lower than the best in the market, in return for a great customer experience,' says Thompson.

Metro may have been early on the challenger bank scene but life there is getting less lonely. Existing players are upping their game: having bought 630 former Lloyds' branches, the Co-operative Bank is set to double in size by the end of 2013 and Virgin Money has gained a toehold in full-service banking, thanks to the 75 ex-Northern Rock branches that it now owns. It calls them 'stores' too, and plans to tempt punters in with iPads and free Wi-Fi.

Meanwhile, non-bank banks such as Asda, Tesco, Sainsbury's, M&S and John Lewis (which should know plenty about the retail business, after all) continue to eye the market speculatively. Bank brands are so devalued that recent research by Uswitch suggested that 53% of customers believe supermarkets would offer the best value as a bank, compared with only 10% who favoured the existing players.

Many have been providing credit cards and loans for years - the leap to full-service banking can't be far away. Tesco in particular is hotly tipped - it has had a licence since 2008, when it bought out its former financial services partner RBS, although it is unlikely to offer current accounts before next year.

Ralph Silva, banking analyst at SRN, reckons this could be the death-knell for banking as we know it. 'Big organisations such as Tesco don't have to make a profit on banking; they can offer it as a loss leader because of the cross-selling opportunities it presents.

'In fact, I don't think there is a future for retail banks anywhere in the developed world; their brands are in the toilet and it has become a commodity business. When cost is the only differentiator, the organisation with the greatest economies of scale and the lowest cost of capital can always offer the best price. Tesco has at least as great economies of scale as any big bank.'

He has harsh words too for other would-be challengers, being pretty sceptical that branch service, however good, is going to cut much ice with the 21st century always-on punter. There simply aren't enough service opportunities, he says. 'That idea is out of the 1950s. When did you last go to your branch? The vast majority of us do our banking online or via mobile phone.'

There is another challenger bank that has quietly carved itself a distinctive niche in the UK market, also based on customer service. It's not a bright young newcomer like Metro Bank; it has been in Britain since the 1980s and dates back to 1871 in its native Sweden. Its 136 branches - from Perth in the north to Truro in the south-west and all points between - are so well dug in that even the mighty supermarkets might struggle to dislodge them.

'Handelsbanken has built up a model over 40 years based on developing close relationships with our customers,' says its gnomic UK chief executive, Anders Bouvin. And that means a very soft sell. 'It's not good for long-term satisfaction if one day a customer finds out he has a PPI policy that he didn't need.'

Soft sell: Handelsbanken's UK CEO, Anders BouvinCompletely decentralised, all decision- making - what kind of customers to sign up, how much to lend them and what to charge - is done at branch manager level, and the bank believes above all in looking before it leaps. 'We only do business with customers who we can meet, have coffee with and understand. That's why we didn't lend money to the PIIGS and didn't get involved in sub-prime. If you stick to your core business and aren't tempted to try and earn an extra buck on the side in a boom, then over time you do very good business.'

It seems to work - UK profits are up 100% so far this year and Handelsbanken is rated one of the 10 strongest banks in the world, according to Bloomberg, ahead of numerous larger rivals and all the UK-based banks. And yet it defies convention, having no lending or growth targets, and it pays no sales-based bonuses either.

'I cannot understand how lending targets can even exist, especially when you mix them with personal incentives,' says Bouvin. 'That's a dangerously potent mixture. It's really the wrong way to manage, because it's very hard to predict the future, no one knows what will happen.'

Doesn't a bank that pays no bonuses find it hard to attract talent? 'Not at all. The people we recruit are typically very experienced, they share our customer ethos, but they come from the high street banks, where they were forced to do things that they know don't add value to the customer. We call them refugees. We pay competitive salaries, but above all we treat our people like grown ups. They blossom.'

Exactly the kind of old-fashioned, eye-to-eye banking that many critics of the post-crash industry say we need more of, in fact. So why doesn't every bank work this way? 'It is not easy to flip the pyramid upside down,' says Bouvin. Most other banks are 'large organisations with seven or eight layers of middle management to be got rid of. That's hard to do.'

Traditional it may be in some ways, but parts of the bank's modus operandi are pretty cutting-edge. Take its profit-sharing scheme, called Octagon. The bank's only corporate goal is to achieve a better-than-average return on equity. Every year, a maximum of one-third of the profits generated by exceeding that target is divided equally among staff. Everyone gets the same amount, regardless of position or seniority, and the money is held in a trust run by the staff. The vast majority, says Bouvin, is invested in Handelsbanken shares.

The first chance an employee gets to withdraw their money from the Octagon scheme is at age 60. That's got to be the ultimate long-term incentive plan and it's for all, not just the bosses. 'It's very simple but quite unique,' claims Bouvin.

The idea of deferred bonuses is starting to be talked about elsewhere in banking, but only in theory, and the timescales under consideration are a mere two or three years. Doesn't making people wait almost their entire career to cash in encourage 'sub-prime' performance?

'I think it works the other way round,' says Bouvin, 'because the more you have vested in the scheme overall, the less each year's allocation matters. It encourages people to do the right thing for the long term, helps keep the bank safe and our customers satisfied.'

So what about the risk of those upstart supermarkets coming in and eating Handelsbanken's lunch? 'Competition comes and goes, but we have a very strong belief in the cornerstones of our model. I would be more concerned if someone seriously tried to copy Handelsbanken. But even if they did, can you imagine how hard it would be to build a branch network with the competency we have here? We have 40 years' experience of running a decentralised bank.'

Back at Metro, Thompson is just as bullish about the future. 'For me, Metro is about building a monument, something that will outlast me. We think we can get to 200 branches within the M25, but our ambition is to be national. Everyone deserves better banking.'

Amen to that. But that apathy he mentioned remains a powerful factor: people may not like their banks, they may not even trust them. But whether they are prepared to act in sufficient numbers for challenger banks to ever be anything more than a high street rarity remains to be seen.



So-called free banking may be on the way out. Of course, we all pay for it one way or another - lost interest, overdraft charges, unwanted financial products and so on - but the UK tradition of providing basic current accounts free of charge is under attack.

The FSA's Lord Turner thinks it stifles competition, the Bank of England is said to be in favour of a monthly fee, and the high street banks are joining in, too. Barclays' new chairman, Sir David Walker, believes free banking caused the PPI mis-selling scandal, as banks looked to bolster their modest margins.

'Free banking is not sustainable in the UK,' agrees analyst Ralph Silva at SRN. 'It's the last country in the G8 to have it. The margins are too thin and the banks can't retain customers for long enough to make any money.'

Making the switch won't be easy, though. In July, Santander stuck its head above the parapet only to have it shot off. The Bank Formerly Known as Abbey said it was withdrawing its 'free banking forever' promise from 230,000 small business customers and would charge a monthly fee of up to £12.50 instead. Such was the outcry that last month it performed a U-turn, meekly announcing that the free option would remain. The threat of a £500 charge on the bank for every customer who complained to the Ombudsman may have influenced its decision.

'I am all in favour of transparency,' says Metro Bank's Anthony Thompson. 'But free banking will not end, because customers want it.'

Retail banking has also suffered from over a decade of subjugation to the huge 'profit centre' i-banks. But the mood is changing. Not only is a retail banker - Antony Jenkins - now shaking up Barclays, but Lloyds Group boss Antonio Horta-Osorio has also called for a return to 'boring' retail banks.

In this brave new world, high street banks are desperate for transparent and legitimate new ways to boost their profits. That means they will be looking very closely indeed at the future of free banking.



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