Iain Clacher: The challenges in store for bank newcomer

Metro, which is opening its flagship branch in London, promises customers a real alternative to the big four high street banks – RBS, Barclays, HSBC and Lloyds Banking Group – whose names have been immeasurably damaged by the banking crisis. But despite widespread public disillusionment, luring customers away from established UK banks will not be an easy undertaking.

In an attempt to hit the big banks where it hurts, Metro is going big on customer satisfaction with its "Love your bank" campaign. The bank is backed by Vernon Hill, the American founder of Commerce Bankcorp, who is credited with creating a new style of retail banking that relies on good service rather than interest rates to attract customers and deposits.

Branches are not to be called branches but "stores", placing the emphasis on the customer rather than the bank.

The traditional glass security screens that separate tellers from customers have been removed allowing for the customer to feel more connected to the person they are dealing with. Stores will open seven days a week from 8am to 8pm (11am to 4pm on Sundays). Unlike many competitors, it means Metro will be open for business when it is convenient for customers. There will even be toys to entertain children and a magic money machine that converts coins into notes free of charge in store.

Apart from these cosmetic changes, the bank is also putting forward a strategy to simplify banking. Customers will be able to open a bank account from scratch in just 15 minutes, with only one form of identification. The bank has also promised an end to stupid rules which damage the customer experience.

Metro's model may sound revolutionary, but underneath the marketing it is actually a move back to more traditional banking. The branch network will cover Greater London and so it will be a regional bank rather than a national bank. The initial 75m funding will support the

establishment of 20 stores, which is expected to grow to 200 by 2020.

In terms of products, Metro will offer traditional current accounts, savings accounts and mortgages for retail customers along with commercial banking for small and medium-sized firms.

Following the traditional model of banking means that lending will be funded through deposits, which reduces the risk of funding problems like those experienced by Northern Rock. Underpinning this is the idea that the bank will pay lower rates on deposits but in return it will provide a much higher level of service.

So what are Metro's prospects?

The bank clearly has institutional support as there have been calls from regulators and government for greater competition in the banking sector. However, this lack of competition is actually one of the biggest challenges faced by Metro.

The big four UK banks have about 70 per cent of all current accounts according to the British Bankers' Association, and Federation of Small Business figures suggest that around 90 per cent of all commercial banking is with the big four.

Regardless of the public outrage against the banks, there has not been a backlash in terms of people taking their business elsewhere. This is, in part, because the actions of the banks, with the exception of Northern Rock, have not impacted upon the services that banks provide to customers. The outrage has been aimed more toward investment

banking, the City bonus culture and excessive risk taking.

The fact also remains that the cost of switching bank accounts is high. New accounts have to be set up, transfers made from the old to new accounts, direct debits and standing orders have to be changed as well as payment details for wages. For many people, the time and effort to move will simply not be worth it, especially when the interest received is going to be uncompetitive.

It will, therefore, be difficult to get large numbers of individuals to move from their existing bank and even harder to entice businesses to move.

Metro is also not the only new bank that has set its sights on capitalising on the desire for a more competitive banking sector and disillusionment with the big high street banks. Tesco and Virgin are both to offer banking services as is the Post Office. In spite of Metro's best efforts to brand itself as the alternative bank, these other new players have established high street names that will carry a lot of weight with customers, so competition will be fierce.

These other newcomers also have a ready-made network of stores and locations that will allow for a much wider level of market penetration at a lower cost. In terms of convenience and competitive advantage, banking while doing the weekly grocery shop is a level of convenience that is difficult to match.

Metro, therefore, has an opportune moment to enter the UK high street banking sector and be a successful and vibrant business, but the challenges ahead are daunting.

Dr Iain Clacher is a lecturer in accounting and finance at Leeds University Business School.