A wave of start-ups are attempting to revive regional banking in the UK, decades after most of the country’s original local lenders were swallowed up by consolidation.
Last month Birmingham Bank became the first to get a full banking licence after acquiring one of the UK’s smallest existing banks from the British Independent Retailers Association.
Lee Bushell, the new bank’s owner, said he wanted to create a lender that could use local knowledge to make better decisions and address the “frustrations” of other small and midsized business owners, who feel increasingly overlooked.
The acquisition of Bira Bank, which has around 6,500 existing customers among the trade association’s membership, allowed Birmingham to skip some of the regulatory hurdles that face new banks. Several other companies are hoping to make similar attempts over the next few years.
Alba in Scotland, B-North in Manchester and GBB in Newcastle are all applying to the Bank of England for licences to open regionally focused business banks. Elsewhere, Banc Cambria in Wales, Avon Mutual in the West Country, and Plymouth-based South West Mutual are hoping to build co-operatively owned banks for retail customers and small businesses.
Although regional building societies play an important role in the mortgage industry, the rest of the UK banking market is dominated by a small number of nationwide lenders. Four banks hold more than half of all consumer and business deposits in the UK, and a much higher proportion of cheap current account deposits. This is in contrast to countries like Germany, the USA and Japan, where the banking market is much more fragmented. The four largest banks in the US, for example, hold just 35 per cent of deposits.
The so-called “Big Four” high street banks — Barclays, HSBC, NatWest and Lloyds — all grew out of regional lenders such as the 19th century Birmingham and Midland Bank, which eventually became HSBC UK.
The new challengers argue that the major banks have lost touch with local businesses as more operations have been centralised, and the revenue thresholds for business customers to receive dedicated relationship managers have risen.
“Customers like it when they know you can understand their business,” said Rod Ashley, Alba chief executive. “It helps to be more locally based rather than at a centralised decision-making contact centre.”
Alba can trace its roots to the local banking movement of the Victorian era — it was set up by the team that led the last surviving trustee savings bank. Mr Ashley said Airdrie Savings Bank, which was founded in 1835, “proved the concept of the regional bank” when it began expanding after the last financial crisis. Its archaic corporate structure meant it could not raise new capital to invest in modern technology, and it was wound down in 2017.
The regional projects have proven popular with local politicians. The Labour government in Wales is supporting Banc Cambria as a way to help communities affected by the shrinking of traditional bank branch networks, a trend hastened by the pandemic. Meanwhile Greater Manchester Combined Authority has backed B-North.
Andy Street, the Conservative mayor of the West Midlands, said Birmingham Bank reflected a growing confidence about the city, and would provide reassurance to local businesses as the economy recovers from coronavirus.
“It brings more choice directly to the local business market,” he added. “Having an understanding of the sectors that really matter here has got to be good.”
However, the new firms coming to market will face a serious challenge: how to build sustainable businesses in a market where even the largest lenders struggle to recoup their cost of equity.
Executives at several of the would-be banks are counting on new cloud-based technology developed by third-party specialists. This can scale in size and cost as they grow, which should make it more affordable for small competitors to keep up with customer expectations without matching the massive IT budgets of big banks or specialist fintechs. They are also hoping that the sense of local connection will encourage customer loyalty while enabling them to make strong credit decisions.
A key test in the coming months will be whether the companies can convince more investors of their visions. The central bank has strict rules to ensure companies are well-capitalised before it grants licenses, and B-North and Alba are both looking to complete fundraisings in the coming months. Birmingham will also need more capital to support its expansion beyond the customers it inherited from Bira.
“We’ve talked about bringing a ‘common sense’ element into decision-making,” said Mr Bushell. “One potential investor said to us the other day, ‘everyone starts off with that intention’ but they fear that it gets lost [over time]. I hope it won’t change with us.”