Can you survive without a bank? Many hard-pressed consumers may now be asking this after millions of RBS and NatWest customers were stranded without access to their own money – thanks to a catastrophic computer meltdown – and Barclays was fined £290m for manipulating interest rates to boost its own profits.
It seems likely that Barclays won’t be the only bank involved in such misconduct. Regulators in Britain and America are investigating at least a dozen financial institutions, including HSBC, Lloyds and RBS.
Given that it was taxpayers’ money that kept some of the banking giants afloat after the collapse of Lehman Brothers, it is not surprising that so many consumers feel fed up with the way they have been treated and are left wondering not just whether banks are too big to fail, but whether they have got too big to manage effectively.
For those who want to vote with their feet and move their money elsewhere, we have looked at whether there are viable alternatives to the high street banks.
For most of us the core thing we need a bank to do is to run a current account efficiently. Until the meltdown at NatWest last month, most of us no doubt took it for granted that our salaries would automatically appear in our bank accounts, direct debits would be paid on time and we could withdraw our own money from a cashpoint when we needed it. But almost two weeks later, some of the bank’s 13 million customers – including those who bank with Ulster Bank and Thinkbanking – are still having problems with their accounts.
But there are relatively few other providers that offer such services. In recent years “newer” entrants, such as Halifax and Santander, have tried to win current account customers from the “big four” – Lloyds TSB, NatWest, HSBC and Barclays.
Despite offering more competitive rates and a £100 upfront bonus to those who switch, neither has significantly weakened the clearing banks’ grip on the market, possibly because most people assume that banks of this size are pretty much all the same. Halifax is, of course, now part of Lloyds Banking Group, and Santander’s attempt to win current account customers has been dogged by persistent customer service problems.
There have been repeated attempts to stimulate competition in the market, but despite this there have been very few entrants. The only significant one is Metro Bank, launched in 2010, but even today it has just 12 branches, all in the Greater London area.
Despite its small size, its founder, Vernon Hill, believes it can provide a real alternative for those looking to ditch the others. It offers a full range of banking options, from current accounts to savings and mortgages, most of which can be run online, although a customer will need to visit a branch to open a current account.
Mr Hill, who is also the vice-chairman of the bank, said no one should be surprised at what had happened at British banks. “The banks have underinvested in customer service for years, and many are running on IT systems that are one step up from a quill,” he said.
In contrast, he said, Metro is focused primarily on customer service. “Our branches are open seven days a week, we have a state-of-the-art IT system, and it should not take more than 15 minutes from you walking into a branch to leaving with a fully functioning current account, debit and credit card.”
Virgin Money has been widely touted as an alternative, having bought Northern Rock, but it won’t be launching a current account until next year. Similarly, there has been talk of the supermarkets launching full banking services, but this has yet to happen.
Marks & Spencer recently announced plans to launch its own bank account (it already offers credit cards, savings and insurance), but its services are effectively run by HSBC. As one banking insider said: “A lot of these new banks aren’t doing anything differently, or better. It’s the same bad old banks but wrapped up in some pretty new marketing – as Virgin Money credit card customers have found out, with some horrendous interest rate rises recently.”
A spokesman for Which? said: “We would like to see enhanced competition in this sector so that consumers have real choice, and poorly performing banks have to lift their game and put consumers first.”
One possible option is the Co-operative Bank, a mutual organisation. It is now the only provider in negotiations to buy a number of branches from Lloyds Banking Group. If this deal eventually goes through, it will give the Co-op a more significant high street presence, while its ethical credentials may appeal to those who are fed up with the practices that were all too clearly demonstrated in the emails from Barclays’ discredited traders published last week.
The other option is building societies, which are owned by members rather than shareholders. Nationwide offers a range of current accounts, and runs its own clearing services. Four other building societies offer current account facilities: Norwich & Peterborough (now owned by Yorkshire), Coventry, Leeds and Cumberland. However, opting for one of these doesn’t mean you are bypassing the banks completely, because they all use a clearing bank to run their systems, as Cumberland customers found out last week e_SEnD NatWest provides this service to the mutual.
Saving and Borrowing
While competition in the current account sector remains stifled, there has been innovation in the savings and loans market, much of it spearheaded by new technology. Zopa, and other peer-to-peer lenders, are prime examples. This company, which launched in 2005, puts those who have money to lend in direct contact with people who need to borrow, effectively cutting out the banks altogether.
Although Zopa takes a fee for arranging this service, the fact that it doesn’t hold the money itself, so doesn’t need to build extensive reserves to cover bad debts, means the rates on offer are far more attractive to consumers. For example, over the past year lenders had earned around 5.5pc on their money, and this is after charges and defaults have been taken into account. Given that the average savings account pays less than 1pc, it is not hard to see why such sites have proved attractive. For those borrowing money, the interest rate is typically a fifth lower than with a high street bank, although most peer-to-peer sites do have strict lending criteria, which means that if you have been turned down by a high street bank you won’t necessarily be able to borrow money through one of these sites. These criteria mean that, to date, the default rate is just 0.5pc.
Zopa may be the biggest peer-to-peer lender by some margin (it has now arranged loans worth £212m) but it is facing competition from RateSetter (which also provides a “default fund” to help cover lenders’ losses) and Funding Circle, which arranges loans for small businesses.
But it isn’t just hi-tech new providers that are offering an alternative in the savings and loans market. More traditional credit unions have also been given a new lease of life thanks to a recent £38m investment from the Government, which should allow them to expand and modernise.
Credit unions already provide financial services to almost a million people in Britain. While many will be on low to middle incomes, in recent years there has been a push to make credit unions a more mainstream option, particularly by sparking the social conscience of better-off savers who are fed up with being taken for a ride by the banks.
This spring, for example, saw the launch of Kensington & Chelsea credit union. Although it is primarily providing loans and savings for those marginalised by mainstream financial services providers – people who often have to rely on payday lenders, pawnbrokers and illegal loan sharks – the credit union is hoping that more affluent members of the borough will deposit money, on which they will receive a “fair” return, in the knowledge that their cash is being recycled and invested within their local community.
There have also been huge advancements in payment technology, whether it’s paying for goods online via PayPal or using a smartphone or Oyster card to pay for goods in shops without the need to enter a Pin. But so far most of these have required people to have a linked bank account to “feed” money into the various virtual accounts. However, it is possible that phone providers will realise they are more trusted than banks and develop technology to allow you to do all your banking on your iPhone, for example.
Insurance and Investment
While banks’ main business is running and money transfer services, most make their money by selling customers other products, which often have far higher margins. This is why banks such as Santander and Halifax have been so keen to take a share of the current account market: they might not make much money there, particularly if you never use your overdraft, but you are a “captive” customer and more likely to buy their overpriced loans, home insurance, payment protection insurance and range of investment products.
The golden rule is never to buy an investment or insurance product from your bank without first shopping around to see how it compares with other products. Use a price comparison website or speak to an independent financial adviser.
Most banks don’t offer this service and sell only a very narrow range of products. And when it comes to investments, the high street banks’ track record is dire, with many of their biggest-selling funds overcharging and underperforming.