It is far too early to consider the crisis that has swept across the Co-operative Bank to be over. Yet we can begin to see the shape of the Bank as it will be once the cloud has moved away.
That future Co-op Bank will be smaller than the one we have today and with fewer pretensions and ambitions. The Bank has as good as admitted this in its statements already — the word it uses ‘deleveraging’ is ugly, but its meaning is clear. It is an admission that the Bank has gone beyond the limits of its capacity and must now shrink.
An example of that is already in play. The Bank is not seeking to extend its operations in the business banking market. While it has avoided reneging on previous commitments to business customers, it is unlikely to offer new loans to large businesses. Small firms may have difficulty borrowing from it, while existing arrangements — such as overdraft facilities — will be reviewed on renewal. Some of these may be closed, or shrunk.
The Bank will lose many of its business customers and the commercial division will be reduced in size. It is similarly resigned to forfeiting many of its local authority accounts. Councils are being warned by their advisers about the risks attached to using the Bank, following downgrades by credit ratings agencies. Given the criticism of councils for losing money in Icelandic banks at the beginning of the global financial crisis, it seems inevitable that many of them will move their funds to other banks when existing facilities come up for renewal. Some already have.
Instead of tripling the size of branch presence, as would have happened with the acquisition of the Lloyds branches as part of Project Verde, the Co-op will soon actually have fewer branches. This will be achieved by implementing the previously stated intention of closing branches where there is close proximity between existing Co-op branches with those of Britannia.
No decision has yet been taken on expanding the banking presence within Group stores. There are a few pilot experiments taking place with branch banking operating in store — similar in nature to the old Handybanks. The pilot studies provide no definitive conclusion on whether these facilities are a useful supplement to the branch network, or where they work best. Some of the pilot projects are working well, others are not.
Other banks — including Ulster Bank, part of RBS — are closing many branches and are looking to roll out multimedia kiosks, for example in shopping centres. These kiosks offer nearly the full range of branch banking facilities, using touch screen controls and without any staff. However, the Co-op has not invested in these, does not have orders placed for them and is not in a situation to buy them at the present time.
In a presentation to investors and analysts a few days ago, Ulster Bank revealed that around 30 per cent of its transactions are now conducted through smart phones. The figure is zero for the Co-op. The only telephone banking possible with the Co-op is to check balances — other activities are manual and involve discussions with the call centre.
While the Co-op focused on its Britannia merger and its Verde bid, it got left behind in the digital race to open new banking channels. The Smile brand continues to be an internet market leader and the Co-op’s business division has an operational, if rather clunky, internet banking operation, but the Bank has failed to make the necessary bet into the necessary technologies to service customer interaction by smart phone. It is badly placed to make that investment now — not least with some analysts predicting further write downs of old loans.
In fact, IT investment failures seem to be a disaster of almost comparable seriousness to the decisions regarding Britannia and Verde. The investment programme of a few years ago has already been written down by £150m — a significant proportion of the outlay and an admission of failure. Most of the system has never actually come into use.
Part of the justification for the high cost was that it created much better opportunities to cross-sell other products to Bank customers. When the system was procured the insurance businesses were regarded as core — disposal of the life and general insurance operations was not part of the business strategy. Rather, synergies from greater integration of banking and insurance were part of the justification for the high cost of an IT system that was lauded at the time by some in the Bank as possibly the best in retail banking in the UK. Yet the system does not fully integrate with that of Britannia’s and now appears to be unfit for the purpose of supporting modern customer needs.
One wonders if the Bank’s systems would have coped had it completed the other mergers that had been in the offing, but which are now implausible. Some building societies had approached the Bank suggesting that they be taken over, while I am aware of one building society that had been approached by the Bank as a potential acquisition target.
The strategy of growth by merger has now been abandoned. With the benefit of retrospection, organic growth, built on market advantage, would have been better. The focus of any expansion hopes will now be on selling more banking products to those members of the Group that do not use the Bank.
It costs £85 to win a current account from another retail bank. The cost is many times less for those customers attracted from within the Group. The Bank also intends to make greater use of another partnership, that with the Post Office. Branch banking can take place for Smile and Co-op customers at Post Office branches — with a greater range of transactions available than is the case with some other banks that have a partnership with the Post Office.
A representative of the Federation of Small Businesses told me recently that many of its members in rural areas had moved accounts to the Co-op simply because of the range of branch banking transactions that can be conducted in Post Offices.
Not all the i’s have yet been dotted, or the t’s crossed, when it comes to mapping out the future. Two reviews will now take place that will be central to determining how the Bank goes forward. There is an internal strategic review that will make decisions on operational matters, including the extent of the Bank’s presence in business banking and the scale of its presence in Group stores.
Perhaps more significantly, the Group is moving ahead with an independent review that will examine the causes of the disaster that overcame the Bank. As well as being chaired by the former Treasury official Sir Christopher Kelly, who is expected to work on the project for two or three days a week for nearly a year, it will be supported by expert advisors, with costs met by the Group.
Learning who we should blame for the calamity may allow observers to direct their anger more accurately, but this in itself is not necessarily helpful. Yet if we can understand the causes of the crisis, perhaps the movement can avoid repeating the mistakes.