Page last updated at 16:42 GMT, Sunday, 10 January 2010

Will Santander challenge the big banks?

By Ian Pollock
Personal finance reporter, BBC News

Santander sign
The Santander sign has gone up on more than 1,000 branches

A big, shiny new name is on display in the UK's High Streets and shopping centres.

The logo of the giant Spanish banking group Santander will soon hang above more than a thousand former branches of the Abbey and Bradford & Bingley banks.

The 278 branches of the Alliance & Leicester, also owned by the Spanish group, will be renamed later this year.

That will bring the total number of Santander branded outlets to 1,300, making it the fifth-largest bank in the UK.

Its position, with 25 million customers, should be a challenge to the traditional dominance of the big four High Street banks - RBS-NatWest, Lloyds, HSBC and Barclays.

"Santander is and will continue to be a challenger to the competition in the UK," a spokesman promised.

Fifth force

Santander first arrived in the UK when it bought the Abbey six years ago.

The Abbey and the Alliance & Leicester have both been extremely competitive when it comes to current accounts
Andrew Hagger, Moneynet

In the wake of the banking crisis two years ago, it snapped up the Bradford & Bingley's branches and the Alliance & Leicester bank, after both had been brought to their knees.

Taken alongside the collapse of the Northern Rock, the continued disappearance of small building societies, and the ill-fated decision of Lloyds to swallow HBOS, the expansion of Santander has contributed to a big drop in choice for banking customers.

But the emergence of the Spanish bank as a genuine fifth force may still inject some much-needed competition into High Street banking.

Although the rationalisation of current accounts, savings accounts and mortgages under the Santander umbrella will continue, it has been trying hard to win new customers, adding one million more last year.

It has recently started offering a current account which does not levy charges for unauthorised overdrafts, to customers who also have one of its mortgages.

And its customers in the UK can now use Santander cash machines in Spain free, which means they will avoid the usual fees for taking out cash or for doing so in a foreign currency.

"For someone with a typically small current account balance and who doesn't go into unauthorised overdraft, there is not much to distinguish the banks," says Andrew Hagger of the website Moneynet.

"But the Abbey and the Alliance & Leicester have both been extremely competitive when it comes to current accounts, whether you are looking for an overdraft or you are always in credit," he adds.


Neither the government nor the European Commission are happy at the way the landscape of UK banking has changed in the past couple of years.

Richard Branson of Virgin
A new face for High Street banking?

That is why half of the recently split Northern Rock - the bit with the savers' accounts - is going to be sold to a new owner sometime in the next few years.

And it is why Lloyds and RBS, both partly nationalised, have been told to sell substantial chunks of themselves, including more than 900 branches, to let some more foreign banks or other new entrants get a foothold in the UK's High Streets.

Several groups seem interested in expanding. Among them are Virgin, the National Australia Bank, which already owns the small Clydesdale and Yorkshire banks, and Tesco - though it has said it does not want other people's branches.

Would any small or new bank be able to grow sufficiently to make much difference?

"Yes they can, especially Tesco," says David Black at consultants Defaqto.

"They have the reputation most banks would kill for and they have huge marketing potential."


The banking crisis and its aftermath have dealt further blows to the country's building societies.

I don't see why our business model won't carry on for many more years to come
Mike Heenan, Stafford Railway building society

In the past two years, several of them, mainly small ones, have had to be rescued from the folly of their own badly-judged lending to property developers or Icelandic banks.

The ones that are still going are now finding life very awkward, because low interest rates have prompted their savers to take out more money each month than they have been putting in.

And this has restricted their ability to lend mortgages to home buyers.

In the town of Stafford, the single branch of one of the UK's smallest building societies, the Stafford Railway, has been open for 132 years.

It sits just 10 yards on the town square from a large branch of the Alliance & Leicester, which will eventually be rebranded as Santander.

On the face of it, the chief executive of the Stafford, Mike Heenan, should be worried for his future and that of other mutually owned societies, big or large.

But he is surprisingly optimistic.

"We have the greatest advantage in mutuality in not having to pay a dividend - I don't see why our business model won't carry on for many more years to come," he says.

He believes the key is to keep things very simple, and points out that the Stafford offers just one variable rate mortgage deal to all customers, old and new, and just one main savings policy.

"I think there is still a market for a very sensible, straightforward product range, rather than the all complications that the financial services industry has got into," Mr Heenan says.

"We are able to offer very competitive savings rates, our management costs are some of the lowest in the industry, which is an essential part of keeping things in balance, and this year we have had a record profit," he adds.


With all the problems, regulatory restrictions and bad publicity surrounding the industry, you might wonder why anyone would want to run a High Street banking operation.

Mike Heenan
Mike Heenan says one-branch societies can survive happily

The answer is simple: do it right and it is fundamentally a very profitable business to be in.

The main reason is that inertia is still high among current account customers.

The Office of Fair Trading (OFT) has estimated that only 6% of them switch their banks in any one year.

And that means lenders have a semi-captive audience which they can charge high fees, and which they can target for the sale of credit cards, mortgages, insurance and other services.

"People are still very reluctant to change - most only do so if they are hacked off with their current lenders," says David Black of Defaqto.

"It's a real struggle to get people to switch - you have got to offer something that sticks its head above the parapet," he adds.

It will take more than just a big rebranding exercise to make the other High Street banks offer services that are recognisably cheaper, as opposed to ones that are simply slightly different.

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