TSB Leads Challenger Banks in Struggle to Win Customers

Jordan Simpkins didn’t even consider moving to a smaller lender such as Virgin Money Plc or Metro Bank Plc when she was looking to switch her checking account.

Instead, the 23-year-old Manchester Metropolitan University student moved her personal account to Royal Bank of Scotland Group Plc from Lloyds Banking Group Plc in January.

“It’s better to go with what you know,” Simpkins said by telephone. “I would never have gone for one of the small banks. You’re just better with bigger. Your money is safer.”

Her decision illustrates the task for smaller banks seeking to attract customers and loosen the grip of Britain’s four biggest lenders, which control as much as 80 percent of the market. TSB Banking Group Plc will become the latest to try to challenge RBS, Lloyds, Barclays Plc and HSBC Holdings Plc for customers when it sells shares in an initial public offering this week.

“People in business still believe that the big four are where you need to bank,” said Norman Tenray, who runs Obas U.K. Ltd. The Preston, England-based plumbing and building supplies firm is moving its business account from Yorkshire Bank Plc, a unit of National Australia Bank Ltd., to Lloyds. “You get a lot of alternatives come in, but they just don’t have the profile or the history.”

Financial Crisis

TSB, based in London, is being sold by Lloyds to comply with European Union state aid rules after receiving a bailout during the banking crisis. TSB says it controls about 4.2 percent of the U.K. checking account market. That’s “below the scale associated with an effective competitor in the past,” the Office of Fair Trading, a former antitrust regulator, said in a letter to Chancellor of the Exchequer George Osborne in September.

TSB said its share of the checking account market doesn’t fairly reflect its control of 6 percent of all U.K. bank branches. It has 631 outlets, and plans to expand its balance sheet by about 40 to 50 percent in the next five years, according to the bank.

“We’ve definitely got strong potential to grow,” said Jatin Patel, products director at TSB in an interview. The bank has “a lot of the infrastructure you’d expect from an established player,” he said.

Osborne is pushing for greater competition and choice in the industry by making it easier for new banks to start up.

Switching Service

A new switching service, designed to make moving bank accounts easier, was introduced in September, though relatively few people have changed accounts. Some 818,681 people changed banks between Sept. 24 and May 31, according to the Payments Council, which administers the service. That’s out of a total of more than 80 million U.K. accounts. All U.K. customers are covered by a compensation limit of 85,000 pounds ($144,000) in the event that any bank, big or small, goes bust.

Consumers that do change lenders are more likely to choose established providers over newcomers, Mintel Group Ltd., a research company said in a report in October.

After spending the six years since the financial crisis cutting their balance sheets and retreating from overseas operations, banks including Lloyds and RBS are focusing on their domestic market and may provide greater competition to new entrants. Both Lloyds and RBS were bailed out in 2008.

Lending Growth?

“The big banks have maintained their competitive advantage based on their scale throughout the financial crisis,” Sandy Chen, an analyst at Cenkos Securities Ltd., said in an interview. “As we emerge from the financial crisis, the big banks are in much better positions from a capital perspective to be thinking about net-lending growth again.”

Lloyds is seeking to attract investors to TSB’s IPO by offering the shares at a discount. The IPO may value the bank at 1.28 billion pounds, less than its book value of 1.5 billion pounds. The stock is slated to start trading in London tomorrow.

Other challengers are also looking to lure investors and clients. RBS plans to sell shares in its Williams & Glyn consumer bank network of 314 branches next year, while Virgin Money, Aldermore Bank Plc and Shawbrook Bank Ltd. are considering stock offerings. OneSavings Bank Plc, a lender to landlords and small businesses started to trade in London this month.

With the exception of TSB, “most challenger banks are so small it’s difficult to see them have any huge impact any time soon,” David Moss, a portfolio manager at F&C Asset Management Plc in London, who helps oversees about 82 billion pounds, said by telephone.

Combined Deposits

Seven challengers, including TSB, Williams & Glyn and Virgin Money, had combined deposits of 76.1 billion pounds and 71.6 billion pounds of loans at the end of last year, according to company filings. That compares with a total U.K. deposits of 1.7 trillion pounds and about 1.8 trillion pounds of loans, according to figures compiled by the Bank of England.

Lenders are trying different methods to win market share. Some, such as OneSavings Bank, target business lending, while others focus on digital banking services or high levels of customer service. Metro Bank offers customers free coin counting and treats for dogs.

“I was sick of the same old institutions,” said Craig Anderson, 45, from Kingston-upon-Thames, England, who joined Metro Bank from Lloyds’s Halifax division in January. “They were a fresh face.”

Metro Bank, with about 27 branches in and around London, has seen customer deposits more than double to 1.6 billion pounds at the end of March compared with a year earlier, according to the company.

Retail Attraction

The industry is also attracting retailers, who can use their existing outlets to offer banking services. Tesco Plc, the U.K.’s largest supermarket operator, started to offer checking accounts this month.

“You need scale because a small bank is unlikely to challenge that status quo,” Benny Higgins, chief executive officer of Tesco Bank said by telephone. Tesco has 6 million customers and deposits can be made at 300 stores.

The biggest banks still face the burden of litigation costs for past misconduct and pressure from regulators to bolster capital. Lloyds, which has set aside 9.8 billion pounds to cover the cost of compensating clients wrongly sold payment-protection insurance, has provided TSB with a legal indemnity from the costs of past misconduct. The cost of those scandals and the reputational damage may advantage newer banks.

“The opportunity is enormous,” Joe Dickerson, an analyst at Jefferies International in London, wrote in a note to clients. “They have the potential to be disruptive enough so as to fundamentally alter the race for profitable share of the U.K. banking system.”

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