Why entering UK retail banking is not so easy as Tesco discovers

Despite the Independent Commission on Banking being keen to see new competition entering the UK Retail Banking Market, it’s not proving to be that easy for new entrants. Tesco, one of the most dynamic and operationally excellent businesses in the UK,  in its second announcement of a delay in its launching of the two key products to be a bank, a current current and a mortgage, is finding it harder than expected to get their new bank launched. The intention was to launch mortgages in 2011 followed by current accounts – the two products essential for a bank. The 2011 mortgage launch date was to have formally moved from 2011 to “early 2012”, but now is “in the next two months” The current account launch which was mooted to orginally have been launched in 2011 is now being announced as 2013 with the introduction of a redirection service as a result of the ICB recommendations influencing the date. Tesco, along with the other high street banks has until September 2013 to introduce this service.

Why is it so difficult to launch a new UK retail bank?

It starts with the regulatory process. It has taken over two and a half years for Tesco to get a banking licence and its mortgage scheme is still not approved. Getting staff FSA approved is proving to be increasingly challenging, even when the person is a well-established banker with a proven track record. It is not unusual for it to take over seven months to get approval. During that time the person is not allowed to even operate in an ‘acting’ capacity even if they are simply swapping roles in an existing bank. This is hampering existing banks and is even more challenging for new entrants.

Secondly the systems required to operate a UK bank are proving more challenging than Tesco could have predicted. Tesco Personal Finance had its systems operated by Royal Bank of Scotland but for Tesco Bank has migrated them off the RBS platform and onto their own Fiserv-based platform.  This proved to be extremely challenging for Tesco with many IT problems. In comparison to the planned split of the Lloyds Banking Group 632 branches, Intelligent Finance and C&G, this is relatively simple. However it has not proved to be, with a number of Tesco customers not being able to access the full details of their savings accounts for a number of days.

Santander has also found the migration of accounts from Royal Bank of Scotland has taken far longer than expected and certainly more troublesome. Santander is a bank that has grown by many acquisitions and with all that experience and its single IT platform, Partenon, should be the bank to find this easiest.

As Co-operative Financial Services completes its negotiations for the acquisition the Lloyds Banking Group Verde package, it would should take heed of the experiences of both Tesco and Santander when it considers how long and at what cost it will take to migrate its acquisition onto a less straightforward platform than Santander’s.

It is not a disimilar situation to that which Virgin Money is now facing given that it has had the keys for Northern Rock since January 2012.

The delay in the launch of the  Tesco mortgage products is being put down to systems challenges and further testing. “We have taken the decision to slow down the introduction of new products until we have settled in the new bank team, processes and systems, having encountered some technical issues during the summer, which resulted in some customers being unable to access online accounts for a short period,” says the retailer.

As Benny Higgins, Chief Executive of the Bank, says “Getting it absolutely right at launch is more important than rushing it. This is for the very long term”.

This is an entirely sensible move on the part of Tesco. Whilst is may be very tempting to launch on the date promised, it is better to get the launch right than to launch and have customer impacting issues. With an increasing focus in banking on competing based on the customer experience – making the right first impression is important and Tesco gets this.

However the delays and the adverse publicity has had an impact on new customers coming to Tesco Bank with the increase in new accounts being measured in small digit percentages.

It is worth noting that despite Tesco being seen as a ‘new entrant’ with a different attitude towards banking they have had to increase their provision for misselling Payment Protection Insurance to £92m – a drop in the ocean in comparision to Lloyds Banking Group’s billions, but it still shows how difficult it is to keep a clean sheet in banking.

Despite Tesco being an organisation that has a reputation for operational excellence they have had, and continue to have, their challenges. Profits for their financial services business were down 65.9% for the first half of the year (the increase in the provision for PPI being a major contributor to this).

With Tesco and Santander encountering difficulties building their challenger banks, there is a clear warning out for the Co-operative, Virgin Money (and NBNK and JC Flowers, both of whom are still looking to create a challenger in the UK market) – Caveat emptor – buyer beware! Be careful what you wish for.

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