The pressing question that Branson – and his bank chief Jayne-Anne Gadhia – will have to answer is whether it is possible to operate a profitable bank in the current regulatory climate while providing dramatically better consumer satisfaction. Will Virgin Money really be substantially different to what is already available? If Branson is able to pull it off, Osborne’s real gamble – to inject change into UK retail banking – will have succeeded.
There is a widespread belief that increasing the number of largish players in the UK retail bank market would make a big difference, including to the supply and cost of credit. Ordinarily, that would be self-evidently true – but in industries that are extremely and very tightly regulated, as banking undoubtedly is, the advantages of competition are much reduced. It is hard for companies – or at least existing banks – to differentiate themselves. During the bubble, it was possible for companies to enter the market, spend a fortune on marketing, raise billions on the money markets and offer astonishingly competitive interest rates on current accounts or ultra-low, ultra-generous offset mortgages. There was a lot of competition and genuine price and product differentiation – but that was utterly unsustainable.
These days, the barriers to entry are massive – and even if you do manage to get in, everybody faces almost identical costs and hence will have to charge very similar prices. Funding costs are similar; everybody must hold similar assets in similar quantities; product innovation is closely monitored. If loans all have to be met from deposits, there is no way that extra competition will by itself boost the supply of credit – to do that, the only answer is to increase the supply of savings or to reduce the amount of money banks have to put aside whenever they make a loan.
But there is one crucial way in which greater competition – from new players entering the market with new ideas and corporate cultures, not via artificial break-ups – would make a real difference in today’s ultra-regulated, homogenised banking market. That is consumer service, which remains pathetically inadequate across the financial services industry. Online banking is a great improvement, and some branches are beginning to open for longer. But overall user experience remains dire and is the main reason why the City is despised by the public. We need new players such as Virgin and Tesco to revolutionise customer service and focus on simple, clear products. Virgin Money’s first branch, which is set to open in Norwich, resembles a lounge: it includes wi-fi access, refreshments and open spaces. It will be open seven days a week until late. YouGov polls show that Virgin Atlantic is the highest rated of all airlines. Virgin Holidays is the highest rated travel agents. Virgin Trains is fourth in transport – but is only beaten by Eurostar, P&O and National Express. The Virgin brand hasn’t always succeeded – but if anybody can introduce proper service to banking, it will be Branson.
Follow me on twitter: @allisterheath