Banking on Miliband
The business news this morning leads on the proposals by Ed Miliband to break up the big 5 branch networks in the UK. Let's consider the business case - Will breaking up the networks and introducing new players make banking more competitive and provide better service? In my view the answer is no, and here's why...15 January 2014
"Bricks and Mortar" banking outside of the capital and a few key city locations is not a very profitable business. The costs are high and with free banking the norm and interest margins squeezed, the returns are poor.
The assumption that banks are making vast sums from current account banking and retail customers is a myth. Most banks would like to divest themselves of over branched networks, in rural or poor urban areas, but were never able to due to the political storms that would ensue, amid accusations of social exclusion of remote rural communities and the poor.
The other factor which seems to have been ignored is the false assumption that more banks means more competition. But the reason they merged in the first place was to achieve economies of scale to be able to compete under the crushing weight of increasing regulation and costs. Each new bank means a new head office, a new risk team, a new compliance team, audit, HR, treasury, balance sheet management and so it goes on. This fixed central cost is proportionately greater the smaller the base of business it is spread across.
Finally will there be any buyers? I doubt it. Lloyd's TSB battled to get its former TSB business away and others that have tried to shed networks have found it difficult. What buyers would be interested in is the future of banking and this is almost certainly virtual; so payment systems, internet banking and mobile banking is where all the focus will lie.
So, Milibands proposal won't improve service or competition and could end up being another expensive interventionist policy proposal that fails to gain traction. It will signal again the dangers to international finance of operating in Britain, where price or business controls are proposed at the drop of a hat. This will give ever more encouragement to the likes of HSBC and Standard Chartered to look to other parts of the world for investment opportunity. Why invest in a country where your investment may be ripped away from you at any moment?
The outcome of Milibands intervention, if it gains traction, could be to ensure lower investment in British banking and a less competitive service than might otherwise be achieved. His advisers should know this, so why is he going down this track?
15 months to go but it appears the UK is already in election mode.