The converting building societies are on course for a takeover war, says Robert Heller. They are entering an overcrowded marketplace, and some of them will not survive.
Hate banks, love building societies. That exaggerated picture of public attitudes poses just one of the challenges that converting societies have wished upon themselves.
Their gains in available capital and managerial freedom create another two-edged sword. What will they do with these splendid advantages?
The same as each other, no doubt. Companies in financial services have an unfailing instinct for herding together, sometimes to plunge into disasters - like the one-stop shopping fiascos that followed Big Bang's deregulation. The societies are manufacturing their own Little Bang. Its logic points to the same result: a full-blown takeover war.
Only some muddled legislation currently stands in the way: otherwise, the ex-societies stand to eat or be eaten. The City will have little taste for stand-alone savings-and-loan companies. The chances of elevating these into dynamic investments by organic growth are small. First, they need dynamic, growth-oriented management: second, their basic markets cannot yield thrilling expansion over a complete business cycle.
As a Bank of England study says, mortgage lending remains 'a safe and profitable business'. That hardly sets the pulse racing. It can, however, cause a rush of blood to the head. Bank managements, sober bodies of people who deplore risk-prone borrowers, rush into risk because 'safe and profitable' bread-and-butter businesses offer no jam.
Their left brains know that the jammier the return, the larger the risk (ask NatWest, with its £90 million bath in options). Their right brains take no notice as they eye the rewards. Since all the brains think alike, more-over, the promise is even more likely to prove illusory. A solo direct seller of motor insurance prints money: new entrants depress returns towards the boring norm.
The ex-societies will all be tempted by direct-selling phone operations, new personal finance 'products' galore, fancy ATMs, and so on, and will end up looking as much alike as existing banks. Differentiation is an acute problem and particularly in financial services - though the rush to become publicly quoted banks has handed Nationwide its solution on a plate. It stands out as the only large mutual left in the game.
This unique selling point will only make marvels if mutuality really does appeal to the better-off customers. These prime purchasers are the enemies of efficient marketing. They are both ridiculously faithful and wildly promiscuous.
Solid middle-class citizens use bevies of insurers, credit card issuers, investment houses, etc., without feeling much urge to consolidate or change companies. This automatic retention enhances profitability, but rules against one-stop shopping and complicates organic growth - which depends on winning new customers and new business. No ex-society is likely to break this stalemate with a customer proposition that will entice an unfair share of new trade.
Anyway, a truly seductive proposition will be imitated much faster than in the sluggish past. The days of shouting down innovations such as interest-bearing current accounts have vanished. The result, predictably, is a proliferation of me-too products that confuse the customer, add more expense than revenue, and cloud the marketing drive.
When NatWest Life was launched, it decimated its parent's 60 insurances without a smidgen of loss: a dozen accounted for over 90% of sales. The eventual big winners of Little Bang will follow a similar course, concentrating on a few strong, genuinely profitable lines which justify high marketing spends and create real profits. They won't build the business around the products, though, but around cherished clients, successfully corralled by IT.
At the sharp end, that means operating as lively retailers, not stodgy financiers. Above all, they will build the brand, mindful that the Halifax's power branding explains much of its putative £11 billion to £13 billion worth. In other words, the big Little Bangers will be top-class consumer marketers. Alas, that isn't where they come from. All those laudable actions could have been taken long ago.
Most new entries to the banking sector are product-and process-led. User-friendly, pro-active excellence of service has been the sector's elusive Holy Grail. It will only be found by internal differentiation: by people-driven management that cherishes employees, too, and builds new systems and cultures that optimise productivity and initiative. How unlike our dear banks - or building societies.
Winners of the probable takeover war may not attain the Grail before economic realities assert their sovereign power. The Bank's study discusses a chilling 'triple whammy' which will cause current fat mortgage margins to diminish: discounts will widen, the housing market will move from boom through to bust, and market shares will fall through tougher competition for deposits. The great god of markets is quite perverse enough to enact this scenario: and to quadruple the whammy as disgruntled shareholders rush for the nearest exit.