David Prosser: Will Treasury hat-trick get a result?

So it is that the Treasury is championing its insistence that at least three
new banks be created from the assets of RBS, Lloyds and Northern Rock as a
victory for the sector’s customers. These three new institutions will force
the banking establishment to finally begin offering its customers a better
deal, we are told.

Will they really? A quick check of Moneyfacts, the personal finance industry
bible, reveals that more than 30 different banks already offer current
account services. The list of mortgage lenders is more than twice as long as
that. In fact, for every banking product you care to mention ? from credit
cards to loans to savings accounts ? there are already reams of providers.
Why should three more, in any of these markets, suddenly produce real
competition that delivers tangible benefits for customers?

Such competition is certainly needed. The industry’s claim that it offers
better-value banking products than any of its rivals on the Continent ? that
trusty old canard of free banking for those in credit spearheads that
argument ? has repeatedly been discredited. Why else do you think all those
foreign banks are so keen to make acquisitions in the UK?

As for free banking, it’s true that unlike in the US, say, Britain’s current
account providers do not charge customers who stay in credit for services
such as writing cheques or making cash withdrawals. But have a look at the
typical rate of interest paid by a current account over the past five to 10
years ? rarely more than 0.25 per cent annually ? and then examine the
banks’ claim that they are not making a turn from their customers. And as
for what the banks have been earning on customers slipping into overdraft,
authorised or otherwise ? probably best not to go there.

Certainly, the new entrants to the banking market we saw before the financial
crisis began did not produce the competition windfall that Alistair Darling
now believes his trio of debutants will create. Look at Standard Life Bank,
for example, launched in the Nineties as an innovative, consumer-friendly
alternative to the high street big boys. A decade on, having made only a
minimal impact in niche markets, the venture was last week sold ? to
Barclays Bank.

Alternatively, take the foreign entrants to the UK banking market. Santander
and National Australia Bank are indeed doing a better job of running the
banks they have acquired than their previous managements (not difficult in
several cases), but their effect on competition has been negligible. The
biggest banks’ share of the current account sector, for example, has barely
moved.

It may be that the new entrants that Mr Darling hopes are coming this time
will do a better job. Tesco and Virgin, in particular, have built their
success on consumer-focused business models, so perhaps they will succeed
where others have failed.

It is possible. Still, Tesco has already hinted that it might consider
charging for current accounts ? it would concentrate on attracting customers
through a compelling Clubcard deal instead ? while Virgin’s record in
financial services is not especially reassuring. Various ventures have been
and gone, but none have broken the mould, or changed the way that
established players operate.

There are a handful of financial-sector businesses out there with something
genuinely new to offer. Think of Zopa, the peer-to-peer lending service, for
example, or even some of the ethical and socially responsible providers.
These, however, operate at the margins, while the new entrants we will see
following the mini break-up of RBS and Lloyds are almost certain to follow
the same model already in existence. Anyone expecting a brave new world of
banking competition is likely to be disappointed.

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