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VIEWPOINT

Banking without the banks

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Peter Welch
Bankecon, Marlow, UK
Abstract
Purpose The nancial crisis and the subsequent distrust of the existing banks have created an opportunity for new competitors to enter the market for nancial services. Organisations from outside banking could use their trusted brands, their stronger grasp of information technology and their stronger customer service ethos to potentially shake-up the provision of nancial services and hence to take business away from the traditional players. This paper aims to examine the potential for these non-banks to enter and expand into the UK nancial services sector and to analyse their prospects, before nally reecting on how big a challenge they face in entering this market. Design/methodology/approach The paper is based on a report entitled Tesco Bank and Virgin money: prospects for banking without the banks released in 2010, which offers an analysis of the UK market and of the main potential entrants. It presents a much abridged version of the report and has also been revised to provide a more international relevance. Findings The paper discusses the strengths and weaknesses of the two main potential entrants, Tesco Bank and Virgin Money, and draws conclusions based on some of the challenges that they will face in seeking to enter this market. Originality/value The paper is very relevant, given the publicly espoused aspirations of both Tesco Bank and Virgin Money to enter the market for nancial services in the UK. It may also have lessons for other new entrants in other countries. Keywords Financial services, Banks, Consumer behaviour Paper type Viewpoint

Introduction How signicant are the effects of the nancial crisis on the future structure of the banking sector? Clearly, the crisis is leading to major changes in the capital, liquidity and accounting regimes for banks. But might the crisis also open up the sector to new competitors on a scale not seen before? Is the distrust of mainstream banks now so deep that ambitious companies in other sectors have an unparalleled opportunity to become major providers of banking services? Opportunities for non-banks to enter the market have been discussed many times before. A 1994 study for the American Bankers Roundtable concluded that banking is
International Journal of Bank Marketing Vol. 29 No. 2, 2011 pp. 190-201 q Emerald Group Publishing Limited 0265-2323 DOI 10.1108/02652321111107657

This paper is based on a report entitled Tesco Bank and Virgin Money: prospects for banking without the banks, written by Peter Welch and Professor Steve Worthington (Welch and Worthington, 2010), available from: www.paymentscardsandmobile.com/banking/ It presents a much abridged version of the report and has also been revised to provide a more international relevance.

essential to a modern economy; banks are not. Commentators have also forecasted that companies from outside banking would use their stronger grasp of information technology and customer service to shake-up nancial services, taking lucrative business away from cautious and insular banks. In many markets, retailers were seen as the biggest threat. Their strong brands, marketing know-how, existing store networks and store and loyalty cards offered a potential entry platform. Indeed, in the UK, leading retailers took up the challenge and have now been offering nancial services for many years. Marks & Spencer (M&S), the leading clothing, food and household goods retailer, entered the market for nancial services as far back as the late 1980s. Tesco and Sainsburys, then the two largest UK supermarket chains, launched banking services in the mid-1990s. Disruptive value brands such as Virgin and easygroup, that operate across structurally diverse consumer sectors (air travel, music retailing, mobile telephony, hotels) have also seen opportunities in nancial services. Virgin Money launched in 1995 with an index tracking unit trust (mutual fund) and has since expanded its range of services. Easymoney, the nancial services arm of the easygroup, now offers comparison sites for mortgages, bank accounts, credit cards and personal loans. However, until the crisis, the non-banks concentrated on a select range of nancial services and often operated through partnerships with existing banks. For example, the UK retailers concentrated principally on credit cards and other forms of consumer credit, simple savings accounts and insurance policies that could be sold directly. Tesco and Sainsburys operated through joint ventures with RBS and HBOS respectively while M&S sold its nancial services business to HSBC. Similarly, Virgin Money offers a select range of nancial services across lending, savings and insurance. It sold its stake in the innovative One Account mortgage joint venture with RBS, though it remains an introducer for the business. Nevertheless, the crisis may have extended the opportunities for non-banks. Tesco and Virgin Money in particular appear to be planning a move from niche players in nancial services to full-service providers of retail banking. Each has signalled their intention to expand with current accounts and mortgages both being talked about. Tesco bought out RBSs stake in their nancial services joint venture and re-named Tesco Personal Finance as Tesco Bank. Virgin Money has announced the purchase of a small regional UK bank to expedite its acquisition of a banking licence and provide a platform for launching a retail banking business. Furthermore, both are ambitious in their visions for retail banking (see Table I). Virgin Money talks of an ambition to offer a new kind of bank in the UK one where everyone benets, while Tesco says it will focus on being simple, straightforward and rewarding loyalty. In the wake of the nancial crisis and given the stated ambitions of Virgin and Tesco in particular, this paper examines the potential for these non-banks to expand into UK retail banking. It begins by reviewing their development as players in the nancial services sector, along with their expansion plans. Next it analyses their prospects by using a SWOT analysis, before nally offering some conclusions and sobering thoughts for these new players.

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Tesco Bank

As you may have seen in the news recently, Virgin Money has been taking steps to become a fully licensed bank. This move is part of our ambition to offer a new kind of bank in the UK one where everyone benets. Where customers can be condent of getting a fair deal and great service. Where we can make a fair but not excessive prot. And where we try and do things in a way thats not just good for our business and our customers, but benets others too. We are thinking about this as a bank that will make everyone better off. It will take some time before were ready to launch the bank, but if youd like us to keep in touch with you so you know when we do, please leave us your details below Focus on being simple, straightforward and rewarding loyalty A full service nancial services business Every little helps How we serve our customers will be our core strength

Table I. Virgin Money and Tesco Bank: banking visions

Notes: Virgin Money statement taken from a box on its website where people can register to be kept informed of its banking plans. Tesco Bank vision from presentation by Benny Higgins, CEO Tesco Bank, at Tescos Retailing Services Seminar, 19-20 November 2009 Source: Virgin Money, Tesco Bank www.investorcentre.tescoplc.com/plc/ir/pres_results/ presentations/p2009/ www.tescoplc.com/plc/ir/ar/archive/ https://uk.virginmoney.com/virgin/forms/ bank-register-interest.jsp

Virgin Money Development to date Virgin moved into nancial services into the mid-1990s. Since then, it has essentially operated as a niche player in personal nancial services, with many of the services actually supplied by third parties even if carrying the famous Virgin brand. Virgin Money was founded as Virgin Direct as far back as 1995, as a joint venture between a member of the Virgin group of companies and insurance group Norwich Union to offer equity savings products directly to the UK retail consumer market. It was one of the pioneers of index-tracking funds which carried low fees compared with actively managed funds. In 1997, Virgin Direct Personal Financial Service Limited launched The Virgin One Account, a joint venture with RBS. The One Account was the UKs rst current account mortgage direct to the retail market. However, in 2001, RBS bought out Virgin Direct Personal Financial Service Limiteds stake in the joint venture and the management team transferred to RBS. Virgin Direct subsequently changed its name to Virgin Money and increased its product offering, adding a credit card offered in partnership with Bank of America (MBNA), additional savings and insurance products. In April 2004, Virgin Group Investments Limited acquired full ownership of Virgin Money and as at January 2010, Virgin Money had over 2.5 million customers with over 2 billion of funds under management and over 2.3 million Virgin Money cards in issue. In January 2010, Virgin Money announced a recommended offer for Church House Trust, a small regional bank offering deposits and mortgages.

Expansion plans Virgin Money has made it clear that it intends to expand in retail banking, arguing that the nancial crisis creates new opportunities. According to the Offer Document for Church House Trust:
The nancial crisis has tarnished the reputation of many UK banks, while market concentration in the sector has increased substantially. This has created the opportunity for a new entrant to provide a better, different form of banking to its customers, thereby increasing competition in the sector. Virgin Money identied this opportunity two years ago and therefore, together with certain partners, it prepared a recapitalisation proposal for Northern Rock plc, the UK mortgage bank which was ultimately nationalised in February 2008. Research conducted by Virgin Money over the past two years has shown consistently that there is a clear consumer demand for Virgin Money to enter the banking market. The research demonstrates that Virgin Money would be both a trusted deposit taker and mortgage lender.

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The acquisition of Church House Trust, announced in January 2010, is explained as a step in this process:
The acquisition of Church House Trust will provide the platform from which Virgin Money will develop a retail banking business in the UK, offering a full range of products to consumers under the Virgin Money brand.

Church House Trust, operating from Yeovil and Leeds in the UK, was formed in 1987. Since then, the bank has taken retail deposits and provided general banking services, as well as providing wealth management, pension and other nancial services consulting functions. Despite its small scale and regional operation, Virgin Money describes Church House Trust as an attractive vehicle for launching a retail banking business in the UK. Among the reasons it cites are: . Church House Trust has all the necessary banking permissions and a good relationship with the Financial Services Authority (FSA), the UK nancial regulator; . Church House Trust has no reliance on wholesale markets for funding, no borrowing from other banks, retail deposits of more than double its loan book, a broad range of savings products and it focuses on detailed personal underwriting; and . Church House Trust offers an IT infrastructure that can be strengthened and built on. Virgin Money clearly envisages the possibility of further acquisitions, commenting in the Offer Document for Church House Trust:
The government has said it hopes the disposal of bank assets will see new players enter the market and Virgin Money may consider opportunities should they present themselves.

In terms of product strategy, Virgin Money says it aims to bring simplicity to the UK banking market which has traditionally been a complex sector. The focus will be on a strong retail deposit base, with Virgin Money saying its approach to banking is founded on developing a sustainable, savings-based business.

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Tesco Bank Development to date Despite the current level of interest in supermarket banking, it is important to note that Tesco like Virgin has been providing nancial services for more than a decade. The supermarket group began offering nancial services as far back as the mid-1990s. Tesco Personal Finance (TPF, now Tesco Bank) has focused principally on consumer credit (credit cards and unsecured loans), savings accounts and insurance. Overall, the bank now has six million customer accounts. For most of its life, TPF was a 50/50 joint-venture with RBS. However, following Tescos acquisition of RBSs stake in TPF in December 2008, TPF is now a wholly-owned subsidiary of the retailer. Tesco announced the renaming of Tesco Personal Finance as Tesco Bank at the time of its 2009/2010 interim results in October 2009. Tesco Personal Finance (now Tesco Bank, Tesco Bank is the trading name of Tesco Personal Finance plc) is now fully-owned by Tesco plc. It falls within Tescos Retailing Services Division. Tesco Retailing Services also includes: . the retailers online shopping channels, tesco.com and Tesco Direct; . Tesco Mobile, Tescos telecoms joint venture with O2; and . dunnhumby, its data analysis and consumer research business. On a fully consolidated basis, TPF accounted for 50 per cent of retailing services prot in 2008/2009. On becoming a subsidiary, TPFs results were consolidated into Tescos UK business for the nal ten weeks of the 2008/2009 nancial year. Expansion plans Like Virgin Money, Tesco is now on record as stating its ambition is a move into full-service retail banking. The Chairmans Statement in Tescos 2008/2009 Annual Report included the following:
We have acquired the remaining 50 per cent of Tesco Personal Finance from Royal Bank of Scotland, a move which will enable us to develop an already very successful nancial services offer towards our objective of becoming a full-service retail bank.

The commentary on Tesco Personal Finance in the 2008/2009 annual report states:
The business is protable and well-capitalised, which is a strong platform from which to pursue our plans to develop TPF from a successful, popular collection of nancial products to a full-service retail bank in the years ahead. The new team, combining experienced management from Tesco and from the banking industry, is coming together well. Their focus for the time being is on migrating systems and customer support over to our own platforms, beginning the development of a branch network in Tesco stores and growing the business, both through existing and new products.

The renaming of Tesco Personal Finance as Tesco Bank reects the strategy of developing the nancial services business in to a full-service bank. In its 2009/2010 interim results statement of October 2009, Tesco commented:
We are pleased to announce today the renaming of Tesco Personal Finance as Tesco Bank in recognition of our longer-term objective of creating a full-service retail bank for Tesco customers, offering a range of banking and insurance services through branches in stores and online.

Current accounts and mortgages are, at the very least, under serious consideration by Tesco. In investor presentations as part of its Retailing Services Seminar 2009 during November 2009, Tesco put forward both as potential new products for Tesco Bank. It listed other potential new products under the headings of: . savings and investments (xed rate bonds, individual savings accounts, investment funds); and . payment cards (debit, prepaid). However, the offer of a debit card implicitly presupposes a transactional account, if not a full-service current account. Clearly, the ambition is to be the personal customers core provider of banking services. On current accounts, Tesco commented in one of the presentations: We want to service our customers main banking relationship, and We want customers to say I bank with Tesco. Analysis Bringing together the proles of Virgin Money and Tesco Bank, how are we to assess their prospects? An obvious way of structuring the analysis of the non-banks prospects is through a conventional SWOT framework. However, in terms of applying a SWOT framework to the non-banks prospects, opportunities and threats lend themselves better to the characteristics of the retail banking market, and strengths and weaknesses to the non-banks themselves. The analysis therefore looks rst at the opportunities and threats presented by the market to non-banks. It then considers the non-banks strengths and weaknesses (see Table II). Opportunities Overall market size. Given their current scale relative to the market, the sheer size of the personal banking market clearly presents a major opportunity. Neither Virgin Money nor Tesco Bank has a presence in the mortgage and current account segments, and even in those major segments where the two non-banks do have a presence namely retail deposits and consumer credit it remains small relative to the market as a whole. Tesco Bank for example has a loan book of around 3.8 million pounds at August 2009, giving it a market share of less than 2 per cent of the market.
Strengths Strength of brands Product innovation Existing customer relationships and infrastructure Weaknesses Opportunities Threats Lower growth prospects for key personal banking segments Fall in structural protability of banking (stronger capital and liquidity requirements) Competitive dynamics and customer behaviour

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Small size Overall market size Need for core skills Consumer anger at Delivery channels mainstream banks Disposals planned by UK Government as required under EC State Aid rules

Source: Authors analysis

Table II. Tesco Bank and Virgin Money: SWOT analysis

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However, the markets sheer size has been an opportunity for as long as Tesco and Virgin started to consider offering nancial services. Both have offered a selected range of nancial services (as direct providers, joint-venture partners, or introducers) for more than a decade. Indeed, if anything, given the likely new business trends in key business segments such as mortgages and consumer credit and the intense competition for retail deposits, the opportunity presented by the markets size alone has diminished. Consumer anger at mainstream banks. The change that may justify a step change in the ambitions of Tesco Bank and Virgin Money is clearly the nancial crisis. In the wake of the crisis, many assume that the level of consumer anger at, and distrust of mainstream banks signicantly increases the opportunities for new entrants. Customers are more ready to consider alternative providers, including those from outside the banking sector. Above and beyond the markets size, it is this change that appears to underpin the ambitions of Tesco and Virgin to move from a selective offering of nancial services to full-service retail banking. Disposals under EC State Aid rules. A further major opportunity presented by the crisis is the possibility of acquiring an existing bank or branch network. Both Lloyds and RBS are required to make disposals as part of the conditions imposed by the European Commission under EC State Aid rules and the UK government intends to sell mortgage lender Northern Rock once conditions allow. However, the disposals are likely to take some time given the complexities of, for example, separating the branches and customer accounts from Lloyds and RBSs existing networks. Other banks, both existing players and potential new entrants to the UK market, are likely to be interested. Furthermore, the integration costs and risks for a Virgin or Tesco of a banking acquisition signicantly larger than their existing banking businesses may be substantial. Threats If the nancial crisis creates new opportunities, it also introduces new threats. While the crisis may open the banking sector to new competitors on a scale not seen before, in important respects it also makes retail banking less attractive. Lower growth prospects for key market segments. First, key personal banking segments face lower growth prospects and/or intense competition, for example, both the mortgage and consumer credit segments are likely to grow much more slowly during the coming years than during the years before the crisis. With wholesale funding less available, competition for retail deposits will also be erce. This will both put pressure on lenders interest margins and may limit the ability of the non-banks to fund their growth in new market segments. Structural protability caused by stronger capital, liquidity and accounting requirements. Second, regulators are imposing tougher capital and liquidity requirements on banks as part of the reforms of the Basel capital adequacy framework. This is likely to reduce the structural protability of banking, making it more capital intensive and requiring banks to hold more lower-yielding assets. More generally, regulators are likely to be wary of banks earning the returns on equity they enjoyed in the years before the crisis. Competitive dynamics and consumer behaviour. In addition to the negative effects of the crisis, Tesco and Virgin also face the challenges of customer behaviour and pricing structures in retail banking. Thus despite all the moves to facilitate account switching,

consumers remain instinctively relucant to change their current accounts. Further, banks remain reliant on opaque and unpopular means of generating revenue from their current accounts, namely high overdraft charges and little or no interest paid on credit balances (dumb money as one Australian banker was brave enough to label it later revised as interest insensitive deposits). The failure of the OFTs court case against unauthorised overdraft charges (and consumer attachment to the misnomer of free banking) is likely to weaken the pressure on banks to move to a more equitable pricing structure. This leaves Virgin and Tesco with the challenge of offering current accounts on a protable basis without themselves relying on overdraft charges and negligible interest paid on credit balances as a means of generating revenue. Strengths Tesco and Virgin Brands. Clearly, a major strength of both Tesco and Virgin is the power of their consumer brands. Both are among the best known consumer names in the UK. While the underlying strategies are a little different between the two companies, the strength of their brands has already enabled Tesco to expand successfully into adjacent sectors and Virgin to establish itself across a range of different sectors. Tesco has diversied to varying degrees into petrol retailing, newspapers and magazines, health and beauty goods, kitchenware, household appliances, CDs, DVDs and even online music downloads. The underlying model here is the supermarket as a one-stop shop. This model extends the parameters of lateral diversication from the retailing of goods to the retailing of services. It is noteworthy that Tescos ambitions to expand its Services segment include Tesco Telecoms and Tesco.com/Tesco Direct as well as Tesco Bank. The strategy of Virgin is to enter and expand in consumer markets where it sees high prices and consumer dissatisfaction, bringing a fresh, convention-challenging approach. The strength of its brand has allowed Virgin to operate across a range of structurally diverse consumer sectors, including air and rail travel, mobile telephony and the internet, health and nancial services. Product innovation. Both companies also bring to banking an innovative approach to products and services. This is already evident in their existing nancial services businesses. For example, perhaps the nearest a retailer has come to literally retailing a nancial service is Tescos travel insurance. Clubcard holders can pick up a pack in-store and take it to the checkout with the rest of their shopping. As soon as the insurance pack is scanned along with the Clubcard, the customer is insured. Virgin of course invented the One Account in partnership with RBS, combining a current account and mortgage in a single product. Customers pay their income and savings into the same account as their mortgage, so using their assets (on which they receive a lower interest rate) to reduce the balance on their mortgage (on which they pay a higher rate). Moreover the One Account also functions as a normal current account, which customer can use to make regular payments and cash withdrawals. Virgins original development with RBS over the One Account and Tescos recently announced insurance partnership with Fortis highlight the scope for using partnerships with existing providers. The success of the supermarkets in own-brand foods offers an analogy, with scope for Virgin and Tesco to lead on marketing, branding and customer service.

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Existing customer relationships and infrastructure. Both companies already have a substantial base of existing nancial services customers to which they can offer new services. As at January 2010, Virgin Money had over 2.5 million customers. As at November 2009, Tesco reported six million customer accounts. Tesco has two additional resources at its disposal. First, it has the base of 16 million Clubcard holders. Second, Tesco has its nationwide retail network through which to promote and support the offer of nancial services. Given these resources, Tesco may be in a stronger starting position than Virgin to expand its nancial services business. The retail network gives Tesco a potentially signicant advantage in distribution. In comparison with new entrants having to use channels such as direct mail or advertising, the stores offer a readily available and low-cost marketing channel for the display of product leaets and other literature. They also offer a means of servicing existing customers. This points to the wider interactions between parent retailer and banking subsidiary. An important benet is that the growth of the bank allows Tesco to internalise within the Group interchange payments that would otherwise ow externally. When Tesco Bank customers use Tesco ATMs, interchange is payable from the Bank to the retail parent. Plus when Tesco Bank credit cardholders use their cards in Tesco stores, interchange is payable from retail parent to Bank. Tesco also presented data at its Retailing Services Seminar in November 2009 (from its in-house data specialist dunnhumby) showing that retailing services customers are its most valuable and most loyal. According to Tesco: . customers who use two retailing services spend four times as much in store than those who dont use any services; . customers with a Tesco credit card spend c.30 per cent more with Tesco than lookalike customers who dont have a Tesco credit card; and . customers with two retailing services (based on customers who have services from both Tesco Bank and Tesco Direct) are 25 per cent less likely to lapse over a 12-month period than lookalikes without services. The gures raise interesting causal questions about whether the most likely consumers of Tesco services are simply its most loyal shoppers, or whether consumers of services subsequently become more active users of Tesco as a retailer. But clearly, the gures indicate a strong relationship between customers of Tesco as a retailer and Tesco as a service provider. Weaknesses Small size. Both Virgin Money and Tesco Bank remain very small in the context of UK personal banking. This is despite the size of their parents, familiarity of their parent brands, and presence in nancial services for more than a decade. Even in its main lending segment, namely credit card and other consumer credit loans, Tesco Bank remains comparatively small. Its loan book of approximately 3.8 billion at August 2009 compares with total outstanding consumer credit of over 225 billion, giving it a share of less than 2 per cent of the market. The current small size of Tesco Bank and Virgin Money relative to the market underlines the challenge they face in becoming mainstream players in full-service retail banking. Something much more

than a continuation of their current organic growth will be needed. Indeed a massive expansion of their nancial services activities will be required. In particular, with wholesale funding much less available following the crisis, Virgin and Tesco will need to increase the size of their deposit bases by an order of magnitude. One option available to achieve a step change in scale would be a major acquisition. However acquisitions, particularly when the acquired business is likely to be larger and more complex than the buyers banking business, inevitably bring their own costs and risks. Need for core skills. Having previously relied on partners, both Tesco Bank and Virgin Money now need to acquire and develop core banking skills in-house. Virgin Money in particular faces the challenge of becoming a provider of nancial services rather than effectively an introducer, even if the services are branded in its name. And for Tesco, having relied on RBSs platforms and systems, it is taking banking in-house. The skills and expertise required may be very different from their existing businesses. Core skills needed to succeed in nancial services include risk, interest rate and liquidity management, and regulatory compliance, with their importance underlined by the nancial crisis. Compare these with the core skills in retailing sourcing products, buying well, merchandising and fullment of the purchase by the consumer. These skills may transfer readily to other retail sectors. For example, supermarkets may use their superior buying power to secure competitive advantage over specialists in health and beauty retailing, but they transfer less easily to nancial services. Both Virgin and Tesco of course recognise the need for banking expertise, but these skills will need to be applied in a commercial environment that is different and that Tesco and Virgin want to differentiate from a traditional retail bank. For example, while Tesco may want to combine the best of banking and retailing, nancial services are not merchandised in the same way as tangible products sold in retail outlets. Only a limited number of nancial services such as one-off travel insurance and foreign currency are purchased through a single transaction at a set price comparable to a retail transaction. Core personal banking services such as current accounts and mortgages involve the provision of an account on a long-term basis for the customer. Customers have to go through an application process, with the possibility of rejection. Also the pricing is more complex, and often expressed as a percentage of the loan or deposit balance. The discounts, special offers and sales central to retailing work less well when applied to nancial services. Indeed, whatever the aspirations of Tesco and Virgin to cut through the complexity of nancial services, compliance requirements related to data protection, identity conrmation and money laundering often push in the other direction. And the crisis is likely to mean a tightening rather than a loosening of nancial services regulation. Delivery channels. A further challenge for both Tesco and Virgin is their lack of a branch network. Tesco, unlike Virgin, has its nationwide retail estate to exploit. While 65 per cent of Tesco Banks business is currently done online, Tesco reported at its retailing services seminar in November 2009 that 70 per cent of customers would welcome an opportunity of transaction banking in store. Greater use of the retail network clearly forms part of its expansion plans in nancial services.

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However, despite their physical proximity, bank branches are very different from retail stores. Shops are essentially outlets for the sale of goods. Customers come to browse and/or purchase specic items. Bank branches are sometimes described as a distribution channel, but this is in many ways a misleading description. Banks are not in the distribution business (other than perhaps for cash itself). They are principally places for the management of bank accounts. Customers may visit a branch to enquire about/apply for a banking service, nevertheless most branch visits are for carrying out transactions on existing accounts (mainly current and deposit accounts), such as paying-in cheques, paying-in or withdrawing cash, and arranging more complex transactions that cannot be arranged remotely. Tesco can of course locate branches within its stores as well as make greater use of its checkouts for banking transactions, however, despite its nationwide retail network, how many of the stores are suitable for branch banking? Tesco has 450 superstores in the UK (November 2009). This is substantial, but compares with UK branch networks of more than 1,300 for Santander and HSBC and approximately 1,700 for Barclays. Furthermore, the installation of branches in stores will be costly for a business that has essentially used a direct model to date. It will need to justify itself in terms of its occupancy of what is otherwise valuable selling space for the core business. Conclusions Before the nancial crisis, both Virgin and Tesco had provided nancial services for more than a decade. However, both were happy to operate as niche providers. They concentrated on a select range of products, operating through partnerships with existing banks and insurance companies. Neither showed an appetite for directly competing as full-service providers in retail banking and perhaps they were wise to do so. In the wake of the nancial crisis, both now harbour ambitions to become full-service retail banks. But are the changes owing from the nancial crisis sufcient to justify such an expansion? Existing banks may be more unpopular, making non-banks more attractive. Nevertheless there is a debit as well as credit side to the post-crisis investment case. Banking is set to be less protable, making the market less attractive. The biggest challenge for Tesco Bank and Virgin Money as full-service retail banks may be to grow quickly and protably while at the same time doing banking in a way that is markedly different from the mainstream. Tesco admits that one of the challenges it faces is the industrys standard economic model. The hurdles to overcome on both current accounts and mortgages are high. The pricing of retail banking products in the UK has in some ways been analagous to the famous description of the art of taxation of Jean Baptiste Colbert, French economist and Minister of Finance under King Louis XIV of France:
The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.

Existing pricing structures are reinforced by the attachment of UK consumers to free current account banking, free credit cards and free ATM withdrawals. In practice, these attachments to notionally free banking services acts as a signicant barrier to innovation and competition in pricing, and has resulted in signicant cross-subsidies between different groups of banking customers.

Virgin and Tesco therefore face the challenge of offering current accounts protably without themselves relying on the same revenue models as existing providers. They also face the challenge of acquiring deposits without either offering unprotable rates or tempting introductory rates and then reducing them over time. Also in light of their stated visions for banking, high standards will be expected. Their services will be closely scrutinised by consumer and personal nance journalists, and ranked in the many comparison sites on the internet. Reputationally, Virgin and Tesco are likely to face tougher standards than existing banks. From the perspective of competition and consumer choice, the banking ambitions of Virgin and Tesco are clearly welcome. Indeed for all those who follow developments in banking, it will be fascinating to watch. This is an attempt to do banking without the banks on a scale not seen before. Virgin has already signalled that it is prepared to challenge the free-in-credit model that dominates personal banking in the UK. But even brands as strong as Tesco and Virgin will nd it tough to shake-up a market with habits and structures as entrenched as UK personal banking.
Reference Welch, P. and Worthington, S. (2010), Tesco Bank and Virgin Money: prospects for banking without the banks, available at: www.paymentscardsandmobile.com/banking/ About the authors Steve Worthington is Professor of Marketing in the Faculty of Business and Economics at Monash University, Melbourne, Australia. He previously worked in the UK as Marketing Group Head within the Co-op Brand, the own label of the Co-operative Wholesale Society (CWS), and prior to this as Head of Marketing and Planning with the Co-operative Bank, a subsidiary of CWS. He has published widely in both academic journals and practitioner-focused publications. His interests focus on the distribution of nancial services and developments in the uses of plastic cards and payment systems for nancial services. Steve Worthington is the corresponding author and can be contacted at: steve.worthington@buseco.monash.edu.au Peter Welch is an independent consultant specialising in the banking and healthcare sectors. Within banking his main areas of work are market and competitor analyses, with a focus on personal banking, cards and payments. He also undertakes research into bank reporting and performance, and has published several journal articles with Professor Paul Klumpes of EDHEC Business School. He maintains a website (www.bankecon.com) with details of his consultancy and research.

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