So after various attempts, Sir Richard Branson has finally succeeded in securing the key part of Northern Rock. It’s a tribute to his tenacity that he has secured his prize and at a knockdown price.
For consumers, Virgin Money’s purchase should usher in much needed competition to the banking sector. It is good news for Newcastle where Northern Rock is headquartered and has a major influence on the economy of north-east England. Already there is a pledge of no redundancies for three years.
Yet the taxpayer gets a raw deal. The Treasury pumped in £1.4bn to nationalise Northern Rock in February 2008, following the credit crunch.
Branson has picked up the juicy assets – leaving the damaged part of the bank alone – for just £747m. This is the sign of a true entrepreneur.
No mutual came forward at the final bidding stage. Many will surprised that Northern Rock, a former mutual, did not attract such support.
The Government will be left holding a large part of Northern Rock which contains difficult loans that Northern Rock should never have undertaken. Quite how the Chancellor will continue to manage this area is unknown. With the eurozone crisis continuing, George Osborne has rather weightier matters to ponder.
Few realise how extensive is the range of financial services that Virgin Money has built up. Founded in 1995, it now offers two tracker and one managed funds, stakeholder pensions (worth over £2bn), general insurance and a credit card. It launched an offset mortgage account in 1998 which it sold to the Royal Bank of Scotland three years later.
Retail banking was the logical next move and Northern Rock brings so many prime high street locations. Although Metro Bank was launched with American funding in London recently and Co-operative Financial Services have expanded their presence through the Britannia network, the UK still needs more consumer banking competition.
The largest five banks – Barclays, HSBC, Lloyds TSB, RBS and Santander – run an estimated 83 per cent of personal current accounts and control 77 per cent of the mortgage market. Of this, Lloyds alone holds 30 per cent and 25 per cent respectively.
As the Independent Commission on Banking, chaired by Sir John Vickers, reported in September, the sale of Lloyds must ensure there is at least one other genuine new entrant to retail banking. Not surprisingly therefore, Which? says a strong challenger to the dominant banks is “vital if consumers are to see greater competition, fairness and a better deal on the high street.”
Certainly Virgin Money (as Northern Rock is now to be known) will shake matters up. Branson, now 61, launched his first business venture – a magazine, called Student – when he was just 16 years old. Today he is reported to be the UK’s fourth richest citizen.
The Virgin Group is an umbrella for some 400 companies. Not all Branson’s schemes have met with success. Some will remember his forays into cosmetics and wedding gowns.
By comparison, there could be great synergy between Virgin Money’s existing financial products and current accounts. Unless someone is a high net-worth client and will then be looked after by the specialist arm of a clearing bank, most banks have moved out of offering investment products and advice. Branson does not look the typical banker. He is now the Johnny Depp of finance.
With major changes expected on the way savings products will be sold within two years, Branson can pioneer a new approach. It is logical that a bank which sees the detailed income and expenditure account of its customers should offer financial help.
Yet whole areas of family finance are not offered by banks currently. Whether it is school fee provision or retirement planning, they are loosing a real opportunity. Instead it has been supermarkets that have increased their financial offers ranging from personal loans and motor insurance to pet cover.
Supermarket banking is hardly developed in the UK, unlike Portugal and the US. This involves a designated area close to the entrance of a store offering a full range of services through video links to experts. With car parking such an issue in town and city centres, this is the next way forward.
Such a link-up could appeal to Branson. However, his current financial range needs to be beefed up. Virgin Money’s deposit and cash ISA rate is a derisory 0.1 per cent AER and so there is plenty of room for improvement. With inflation at five per cent, albeit down from 5.2 per cent this week, savers are losing money in real terms.
GoCompare, a money comparison website, says 28 per cent of current account holders have never switched bank and that only four per cent have moved in the last 12 months. Northern Rock’s sale should change this for ever.
Conal Gregory is the Yorkshire Post’s personal finance correspondent.