Santander will be the winner from RBS’s Williams & Glyn compromise
The UK Treasury’s plan to boost SME banking competition by paying RBS customers to go elsewhere doesn’t make sense if they are simply pushed into the arms of another huge, global player.
Would you swap your bank account to another provider if you were paid to do so?
This seems like a ridiculous question as many people would change their bank for free, if only they had the strength and patience to navigate the byzantine process involved. This is what makes customer deposits so pleasingly sticky.
For RBS small business customers, however, their bank will soon not only be offering to pay them more than £1,000 to switch their account to another bank, but will also arrange it for them.
This bizarre situation is the result of the UK Treasury’s alternative remedies package for RBS following the UK bank’s failure to sell its Williams & Gyn (W&G) subsidiary by December 31 last year.
The sale of W&G was to be the last piece of the divestment puzzle demanded by the EU in exchange for the state aid that was pumped into RBS after the financial crisis. The UK government still owns 72% of RBS. The bank managed to sell Direct Line insurance, Citizens Financial in the US, Worldpay and Sempra, but W&G proved a sale too far.
The terms of the alternative plan to satisfy the EU were finalized in September and the scheme will kick off in the first half of next year.
One part of it involves RBS encouraging 220,000 eligible W&G customers to switch their accounts to participating challenger banks – and even paying a ‘dowry’ to those competitors to take on RBS’s own customers.
£275 million of the £800 million plan will go towards incentivizing customers to switch, along with a further £75 million to cover the costs of them doing so. RBS will also pay £425 million into a capability and innovation fund, the purpose of which is to encourage challenger banks and other financial institutions to develop and improve financial capability and technology in the small and medium-sized enterprise (SME) sector.
RBS will pitch the offer to switch accounts to 220,000 eligible business customers. If the bank has pledged £275 million towards this, it suggests that it is going to offer a dowry of £1,250 to each customer that switches. That is quite an inducement. The initial plan envisaged £175 million for account switching, which would have translated into a £795 nudge instead.
RBS will be gifting a portion of the bank’s customers to [Santander] and covering the costs of doing so as well
Why the need to hike the incentive by more than 60%? Deposits are notoriously sticky and maybe business customers aren’t willing to move their business to what they view as an untried challenger entrant. The fact that the dowry has had to be increased by so much suggests this might be the case.
Some of the extra money has come from scrapping a plan to allow customers that switch to still use the RBS network. This would have been a thinly veiled attempt to make customers feel that nothing has changed.
If there is insufficient take-up of this switching scheme, RBS will have to pay a further public contribution capped at £50 million. If it is offering £1,250 to switch, that is equivalent to 40,000 customers. It is unclear as to exactly what level of take up constitutes “insufficient”.
Perhaps it is not surprising that W&G customers might need such a push to move their accounts away from an established high-street brand name to some of the newer challenger offerings. These are SME business accounts and many of the newer players do not even offer equivalent products and services for them to switch to.
However, a closer look at the challenger banks that are eligible for this incentivized switching scheme reveals that the list includes at least one bank that does not exactly fit this profile: Banco Santander.
Footing the bill
Yes, UK taxpayers will be footing the bill for RBS to pay customers to move to Banco Santander, a bank with a huge, global SME business and recipient of Euromoney’s best bank in the world for SME’s award this year. Its recent acquisition of Banco Popular makes it number one for SMEs in Spain, while its UK business already contributes 20% of group profit, behind only Brazil at 21%.
Santander must be rubbing its hands in glee at the prospect of RBS paying clients to further boost its own UK market share. It must be particularly cheering for the Spanish lender, which has repeatedly tried to buy W&G from RBS. Talks failed in 2012 over IT issues and again in September last year over price.
Now RBS will be gifting a portion of the bank’s customers to it and covering the costs of doing so as well.
SME business banking in the UK is dominated by the big four clearing banks and the worthy aim of the alternative remedies package is to change this.
However, Santander is a far more recognizable high-street name in the UK than other eligible challengers, such as TSB, Clydesdale, Yorkshire Bank or Metro Bank, so would presumably be a more palatable alternative for W&G clients that might be reluctant to switch.
It will be interesting to see how many W&G SME clients end up at Santander. Rather than boosting the fortunes of plucky challengers, the scheme could end up simply compounding the existing advantage of a global player.