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Buying yon bonnie banks

Virgin Money branch
Virgin Money operates under the licence for Clydesdale Bank
  • As Virgin Money's directors agree to Nationwide's takeover bid, it marks an important moment in the decline of Scottish-based banking

  • The growth in "challenger banks", taking on the dominant players based in London, has gone into retreat

  • For Scottish business, like elsewhere, there's the loss of a personal link to the top people who used to understand customers' needs.

While branches close by the hundred and your money is now handled through chat bots and contact centres, Scotland is also suffering from the loss of bank headquarters.

And the consequences of increasingly rootless and distant banks could be serious for the wider economy.

On Thursday, the directors of Virgin Money UK plc announced they have agreed to recommend to shareholders that they vote to accept a £2.9bn takeover offer by Nationwide building society.

Virgin Money operates under the licence for Clydesdale Bank, which took it over in 2018 and adopted its brand, saying farewell to the older brand's presence in Glasgow since 1838 while, for no obvious reason, continuing to print Clydesdale bank notes.

That commitment to the deal also comes from the holding company owned by Virgin Group founder Sir Richard Branson, which has a 14.6% stake. In addition to trousering more than £400m from the sale, his group gets £20m for each of the six years while Nationwide continues to use the Virgin brand.

At a 40% premium to the recent share price, it's not hard to see why directors have agreed. Such "challenger banks" have begun to look more of a challenge to themselves than to their bigger rivals.

The prospects of Virgin Money growing from sixth largest bank in Britain to rival the established giants were not good. Regulatory costs weigh heavily on smaller banks, and upstarts with whizzy apps, without the legacy and focused on the relatively easy, lower-risk stuff - Monzo, Starling and Revolut, for instance - attract customers by the million.

Cost-cutting

So under Nationwide, Virgin Money and Clydesdale, along with the former Yorkshire Bank, become part of a building society. As things stand, the combination is set to have total assets of £366bn and total lending and advances of around £283bn, representing the second largest provider of mortgages and savings in the UK.

Nationwide gets Virgin Money's strengths in business lending, while extending the customer orientation of a mutual.

Some HQ jobs in Glasgow may be lost where they overlap with those at Nationwide's head office in Swindon. That includes David Duffy, chief executive since 2015, who will leave by the end of the year when the takeover should be complete.

The new owners are committed to the workforce of more than 7,000 people, mostly in Glasgow and Newcastle, and to branches. But that's only in "the medium term", which looks like 2028 for branches at least.

The demise of branch banking is being driven hard by banks themselves: coincidentally, I went into a Virgin Money branch this week with a friend who is a customer there, who wanted to open a cash ISA but didn't want to do it online.

There was a blank look, and after 10 minutes in the back office, a gormless answer: "you could make an appointment with someone who can help, but there's a long wait, and appointments are made at another branch - before then, we might find someone who could show you how to do it online".

By 2028, the new bosses will have decided if they want to run the operations separately or gain from synergy and cost-cutting. Though Nationwide is not accountable to shareholders, the cost-cutting option looks more likely - if it can't be as nimble as the app competitors, it makes sense to use its scale.

Challenger banks

Dial back a few years, and you would hear questions of whether Scottish banks and their canny reputation could survive the ignominious near-collapse of the Royal Bank of Scotland and Halifax Bank of Scotland, both headquartered in Edinburgh. The capital recovered from the blow better than many expected.

But under Lloyds Banking Group, HBOS quickly lost executive power from its HQ on the Mound. It returns to Scotland each year for its annual general meeting, but there's no pretence that it is based north of the border.

Under government ownership, Royal Bank of Scotland continued to pay homage to its Scottish roots. It spent years eating humble pie, and it had to make use of its colossal headquarters campus at Gogarburn, near Edinburgh Airport.

But now with minority state ownership and rebranded to NatWest, its London-based executive team pay less and less attention to those roots. Royal Bank of Scotland is only retained as a brand in Scotland, and with more staff working from home, Gogarburn is operating far below capacity.

RBS branch
Royal Bank of Scotland is only retained as a brand in Scotland

Clydesdale Bank was a distant third among Scottish banks. It had also taken big risks on lending. Its parent company, National Australia Bank, despaired of it and the huge costs of redress for mis-selling financial products. It struggled to offload it, eventually spinning it off in a stock exchange float.

Such new "challenger banks" were encouraged by government and by regulators with relaxed capital rules, and a share of funds which Royal Bank of Scotland had to pay as compensation for the state aid it received.

Scotland's two main cities did exceptionally well at attracting them. Virgin Money put its HQ into Edinburgh, and bought the less toxic remnants of Northern Rock, an important part of the economy in north-east England.

TSB, spun off by Lloyds, retained its historic HQ on Edinburgh's George Street, but was taken over by Sabadell of Spain and ran into expensive problems in updating its IT systems.

Two new banks, the financial arms of Sainsbury's and Tesco supermarket chains, put their headquarters in Edinburgh, and Tesco followed up by locating its main processing and contact centre in Glasgow.

'Bit of a disaster'

Now, however, banks look much less attractive for big brand expansion. Government and regulators look less favourably on challenger banks. And as they retreat, that means less competition in the bank market, and risks higher costs for customers.

Tesco's is being sold to Barclays, and Sainsbury's has failed to find a buyer, so it is winding down its bank.

For Scotland, that is a lot of bank headquarters to lose in only 15 years. Does that matter? According to Ian Fraser, an author and commentator on banking, it is a "bit of a disaster" for the Scottish economy more widely.

Man at Tesco Bank ATM
Tesco Bank is being sold to Barclays

"It's very serious," he says. "People in business were used to being able to walk a few hundred metres from their office to the bank. They got to know the managers there, who understood the needs of the business, and that included the people right at the top.

"Therefore, the bankers had a very good knowledge of the needs of the industrial base of the companies located here. That was a huge advantage for Scotland. But now the people who make the ultimate decisions on finance are based elsewhere."

"It's the branch economy syndrome," he adds. Decisions made elsewhere. And that applies not only to finance, but also to businesses in other sectors being bought over and losing HQ functions to other parts of the world.

Scotland continues to do well at attracting jobs through inward investment in back office technology, processing and risk functions, and there is a lively financial technology sector, clustered around universities. These are skilled staff who can make banking more efficient.

Big data gives bankers ever more detailed read-outs of customer behaviour, both retail and business. But it is at the cost of more physical distant from customers, and over time, lending decisions will be handled more often by machine.

In lacking the key figures at the top of banking, Scotland is far from alone. And similar smaller countries lack such easy access to the financial powerhouse and capital markets of London. But Scots have seen an unusually sharp decline in a feature of the economy they have long taken for granted.