The service matters are crucial in banking sector given to the heavy competition in UK. The new entrant of Metro bank and its success has inspired many players to enter UK and the ways and means of the bank that made possible the success are important points that need study. The success factors that influenced the customers to switch their accounts and the role of efficient and accurate service will be discussed and reviewed and the performance of Metro bank will be analyzed.
- To what extent services issues matter in banks?
- Does service really gives a competitive advantage to a bank?
Metro Bank PLC is the first bank that has been established in UK since more than 100 years. The bank entered UK in the backdrop of tough regulation in the back drop of crash of Lehman brothers but banks on the customers who are ignored by high street banks in UK and the quality service they are lacking until now. To face the stiff competition its competitors, Metro Bank adapted retail banking model, which offered old-fashioned banking with swiftness in service delivery using the modern information technology. Though it is having fewer stores (branches) as of now, their number is being increased rapidly and it plans to reach 200 only in London by 2020.
As per the research questions, the background of the topic lies in the severe competition the banks are facing and their necessity to consolidate the market as well as to find new customers. However, finding a new customer is difficult in banking sector as net worth of the customer is a necessity for banks to accept them as customers. The absence of net worth for a customer may result in more number of customers but less business.
Hence, to attract new customers of having good net worth, the only aspect that can be relied on in the highly competitive globalised banking business is the service. Hence, the topic is based on service matters. As the banking sector offers products that have enhanced value with better service, the research of effect of service on consolidating the market and attracting new customers would be a justifiable research for the problems in banking sector. If the service matters offer a substantial ground for the banks to increase business, it would be a matter that evokes the sub-topics for the future research. Hence, the expected potential of the service matters in banking sector justifies the research.
Establishment of Metro Bank
The first bank that has been established in London in the last 100 years is Metro Bank and this fact indicates the difficulty of forming a bank in UK. According to The Telegraph (2010), the Metro Bank received a lukewarm response from industry commentators. Though the bank has offered products suitable to all type of people, retail opening hours and unparalleled service as well, according to industry experts’ opinion is that it is difficult for the bank to be successful. However, they praised the bank for offering longer opening hours, which are from 8am in the morning to 8pm in the night on week days and 11am to 4pm on Saturdays.
It boasts about the service speed as it takes only 15 minutes for a customer to open an account. In addition to that obtaining of credit card is also easy and faster than other banks as they are printed in the store after the completion of processing. In addition to facilities like offering coin counting machines and safe deposit boxes, it also offers personalised banking services. Regarding these services, ‘local managers will be empowered to take decisions on loans for local companies’ (The Telegraph 2010).1
Service and how it matters in present day banking
When the decisions on loans will be transferred to local managers, the concept of the lip service of ‘customer is king’ the banks move towards a specific zone in services, which decides the kingly nature of the customers by their value to the bank or the nature of business they offer. In that sense, the bank values the feedback of such customers and thus, they are capable of influencing the service process ‘if there is a systematic process of collecting and disseminating customer feedback’ (Rasian & Ming, p. 150) in the organization. It is difficult for a bank to please the customers with their services, because, the service initiatives of most of the banks depend on the ‘front office operations that are designed to be efficient for the business is not necessarily effective or pleasant for the customer’ (Rasian & Ming 2010).
Hence, when customers are dissatisfied, they go online for complain and do so with negative feedback. However, the above-mentioned feedback may not be valued in several banks in which the strategies and processes are developed inside out but not from outside in. That makes the service initiatives useless in need. For example, integrative voice interactive systems would have everything except the necessity of the customer. Hence, Rasian & Ming (2010) mention the psychological effect of feedback on bank staff performance. The effect of feedback on staff depends on ‘behaviour, control, social cognition, self efficacy and goal setting’ (Rasian & Ming 2010).
To understand the customer expectations and to make the system in the bank conducive to it, it is necessary to understand the perceptions or ratings of customers regarding the services of banks. In this regard, Witkowski T & Kellner J (n.d) explain the ratings of German and American banking customers about the services from the banks. Witkowski T & Kellner J (n.d) opine that the customers from different countries have different perceptions regarding services of the banks. Some consider trust and friendliness and other may consider accuracy in service and efficient investment advice’ (Witkowski & Kellner 2010).
However, Metro bank is trying to do the both. In the present case, it is necessary to consider UK context for Metro bank. Regarding that ICB (2010), in its report recommends that its aim is to create more stable and competitive basis for UK banking for a long term. To do so, ICB (2010) opines that the system in a bank or banking system should not ‘succumb to financial crises and the huge costs they bring’ (ICB, p. 1).
To achieve that performance, ICB mentions about structural separation. According to its views, the structural separation would insulate retail banking services from global financial crises that cause shocks to the banks and result in losses. The reason is that the structural separation will ensure that the retail banking will be separated from global wholesale/investment banking. Hence, the system has to identify retail banking and investment banks. For example, the banks under the wing of domestic retail banking services take deposits as well as offer overdrafts. However, the total separation results in separation of these two, which affects the service efficiency of the banks (ICB 2010).
If tried to improve service efficiency, if the banks resort to mortgages like Lehman brothers or excessive wholesale deposits like covered bonds like Northern rock, it may result in lack of liquidity. However, service option cannot be ignored to attract new customers of reasonable net worth and to increase business. Hence, ICB (2011, p. 35) suggests ring-fence for retail banking. Explaining about ring-fence in retail banking activities ICB (2011) explains that ring-fenced banks would take retail deposits and provide payments services. In addition to that they even supply credit to individuals and businesses.
By taking a variety of forms and simultaneously introducing ‘restrictions where and only where they are necessary to achieve its purpose and objectives’ (ICB 2011), the bank can shield itself from financial shocks from external atmosphere and offering satisfactory service to the customers. One such restriction mentioned above is regarding isolation of banking activities. The isolation is in the context of necessity of provision service to the economy in which the bank exists.
The isolation ensures that the provision of service will not be threatened due to the results of activities that are incidental on it. Moreover, the bank should be in a position to provide the service even in the event of failure without any solvency support from the government and isolation helps in that way. The ring-fence for retail banking also ensures the reduction of cost to the economy due to the banking services. The important aspect in insulation is to ensure that the banking services to the individuals and businesses will not be affected from the problems in the financial system of economy. That means, the retail deposits need not be used to wholesale banking could be one of the possible insulation or the restrictions of ring-fence (ICB; 2011).
The Way Metro Bank operates
The critics have undermined the instant-access savings account, which offers an interest of just 0.5 percent. The present best-return for savings bank account in the market is 2.8 percent and the low interest on the name of instant-access may not yield results; according to them. Apart from quick service and long opening hours, the products like mortgage offering is also uncompetitive according to critics. This is because, it offers two-year variable rate mortgage for the customers and give them 3.5 percent, but the same borrower could get four percent in other banks. Though there are best-buy rates of 2.29 and 299 percent respectively in this product, there are banks who offer higher interest rate than the Metro bank (The Telegraph: 2010). However, the Metro bank is trying to be more ‘traditional and offering customer-centric services by offering extended branch hours and approachable staff-based services’ (Gritten 2011, p. 101).2
This is due to the fact that the financial crisis resulted in changes in EU financial sector and in UK as well. According to McCrudden (1999, p. 12) Bank of England considers different models of financial regulation and he cites Brian Quinn who worked for Bank of England about the development of regulation or a prudent framework that is being evolved. The framework includes cross-border regulation and competition aspects and legal structures regarding electronic commerce as well. These issues consider the risk posed by a firm or a bank.
The regulation deals with compliance and capabilities of the bank and decides on establishment if the compliance and capability standards are high in the competitive environment and the financial soundness of the firm also considered as well (McCrudden 1999, pp. 11,12,114).3 As ‘Franklin National Bank, Bankhaus Herstatt, Barings Bank, Piper Jaffray, Banesto, Credit Lyonnais, Daiwa Bank, Long Term Capital Management, and Allied Irish Bank (Herring & Schuermann 2005, 16)’ have been harmed by excessive position risk, the banking regulation in UK do not admit excessive position risk, which harms the financial position and profitability of the bank thus negatively affecting its customers (Herring & Schuermann 2005, 15-16).4
Service and how it matters in present day banking
From the lip service of ‘customer is king’ the banks are moving towards a specific zone in services, which decides the kingly nature of the customers by their value to the bank or the nature of business they offer. In that sense, the bank values the feedback of such customers and thus, they are capable of influencing the service process ‘if there is a systematic process of collecting and disseminating customer feedback’ (Rasian & Ming, p. 150) in the organization. It is difficult for a bank to please the customers with their services, because, the service initiatives of most of the banks depend on the ‘front office operations that are designed to be efficient for the business is not necessarily effective or pleasant for the customer’ (Rasian & Ming 2010).
Hence, when customers are dissatisfied, they go online for complain and do so with negative feedback. However, the above-mentioned feedback may not be valued in several banks in which the strategies and processes are developed inside out but not from outside in. That makes the service initiatives useless in need. For example, integrative voice interactive systems would have everything except the necessity of the customer. Hence, Rasian & Ming (2010) mention about psychological effect of feedback on bank staff performance. The effect of feedback on staff depends on ‘behaviour, control, social cognition, self efficacy and goal setting’ (Rasian & Ming 2010).
To understand the customer expectations and to make the system in the bank conducive to it, it is necessary to understand the perceptions or ratings of customers regarding the services of banks. In this regard, Witkowski & Kellner (n.d) explain the ratings of German and American banking customers about the services from the banks. Witkowski & Kellner (n.d) opine that the customers from different countries have different perceptions regarding services of the banks. Some consider trust and friendliness and other may consider accuracy in service and efficient investment advice. However, customer may concur on some issues, which are regarding ‘bank size, information by mail, and corporate social responsibility’ (Witkowski T & Kellner J; 2010).
As the present case is regarding a bank in UK, it is necessary to consider UK context. Regarding that ICB (2010), in its report recommends that its aim is to create more stable and competitive basis for UK banking for a long term. To do so, ICB (2010) opines that the system in a bank or banking system should not ‘succumb to financial crises and the huge costs they bring’ (ICB, 1).
To achieve that performance, ICB mentions about structural separation. According to its views, the structural separation would insulate retail banking services from global financial crises that cause shocks to the banks and result in losses. The reason is that the structural separation will ensure that the retail banking will be separated from global wholesale/investment banking. Hence, the system has to identify retail banking and investment banks. For example, the banks under the wing of domestic retail banking services take deposits as well as offer overdrafts. However, the total separation results in separation of these two, which affects the service efficiency of the banks (ICB; 2010).
If tried to improve service efficiency, if the banks resort to mortgages like Lehman brothers or excessive wholesale deposits like covered bonds like Northern rock, it may result in lack of liquidity. However, service option cannot be ignored to attract new customers of reasonable net worth and to increase business. Hence, ICB (2011, 35) suggests ring-fence for retail banking. Explaining about ring-fence in retail banking activities ICB (2011) explains that ring-fenced banks would take retail deposits and provide payments services. In addition to that they even supply credit to individuals and businesses. By taking a variety of forms and simultaneously introducing ‘restrictions where and only where they are necessary to achieve its purpose and objectives’ (ICB; 2011), the bank can shield itself from financial shocks from external atmosphere and offering satisfactory service to the customers.
One such restriction mentioned above is regarding isolation of banking activities. The isolation is in the context of necessity of provision service to the economy in which the bank exists. The isolation ensures that the provision of service will not be threatened due to the results of activities that are incidental on it. Moreover, the bank should be in a position to provide the service even in the event of failure without any solvency support from the government and isolation helps in that way. The ring-fence for retail banking also ensures the reduction of cost to the economy due to the banking services. The important aspect in insulation is to ensure that the banking services to the individuals and businesses will not be affected from the problems in the financial system of economy. That means, the retail deposits need not be used to wholesale banking could be one of the possible insulation or the restrictions of ring-fence (ICB; 2011).
The regulations that compel ring-fence like restrictions consider shortcomings that ‘appeal of the direct use of bank internal models to set regulatory capital requirements for bank credit risks (Kupiec P; 2005, 146)’. This results in mandatory subordinated debt issuance policy. This in turn results in a credit risk capital requirement. To relieve itself from the regulatory restrictions, Metro bank concentrated on the ways and means of delivering the services instead of offering competitive rates when compared to its customers. It promised its customers that it would open 200 branches (stores) around London and high quality and standards of customer service and this concept of doing banking business emanated from the belief that the profit will be a byproduct of customer service.
In this regard Arunkumar (2010) cites Chairman and co-founder of Metro Bank Anthony Thompson about the profit as a byproduct of good customer service. His approach is three pronged, which focuses on business model, to grow great businesses. He doesn’t support acquiring frown companies as he believes that businesses cannot be acquired but be developed (Arunkumar 2010).5 In addition to that the extra working hours can attract the customers who find the evening a best time to go to the bank and they will be in majority too. Hence, one can find a scope to increase number of savings bank accounts (Correcting and Replacing Metro Bank Opens on July 29th 2011).
Competition and insulation from isolation
The increase of savings bank accounts may ease the restrictions of ring-fence and seems to be influential and necessary, but the implementation and framing them would be difficult for the banks like Metro bank, which consider offering services as top most priority than the safety or adopt aggressive policy of offering services. However, Ravichandran K, Mani B.T & Arunkumar S (2010, 118) suggests that the cognitive and affective responses of perception of service attributes are necessary to decide the customer satisfaction and this could be applicable in banking sector.
Ravichandran K, Mani B.T & Arunkumar S (2010) cites Parashuram et al (1985) about the development of customer loyalty, but in the case of banking sector, the customer loyalty should not be at the cost of liquidity of the bank as profits of the bank depend on repayments of the loans and sufficient retail deposits. Hence, a ring-fence has to link the liquidity caused by retail deposits to the profitability of loans or other funding services like overdrafts. Hence, the service aspect and customer satisfaction has a link of health of the bank (Ravichandran, Mani & Arunkumar 2010).
Regarding service aspect and staying safe financially as well, the Metro bank can be taken as example, which tried to redefine the banking experiences of UK customers. The strategy of the bank is to offer services in an excellent way to attract new customers and to consolidate the business in UK market. The service options are regarding offering unlimited convenience and guaranteed satisfaction to the customers, which is not that much important hitherto.
Metro bank tried to clear the confusion in the customers, which is a result of global financial crisis in 2008 and tried to meet their demands on ‘stalwart products that they understand and by which they feel assured’ (DataMonitor; 2010, 5). Metro bank focused on convenience and personal recommendations of customers. Regarding the above aspect, DataMonitor (2010) chooses to explain the situation provided by Metro bank about the choice of current account to customers. The convenience is also regarding opening hours of the bank and needs of consumers, who demand high level of service in the midst of their busy lives.
Irrespective of costs associated with the current account opened in it, Metro bank has attracted the customers to open current account due to their lack of trust in other banks of UK. The important aspect that brought value to the services of Metro Bank in UK is that it has moved away from the ‘complex funding structures that led to the precarious finances’ (DataMonitor; 2010, 6). That move has greatly appealed the UK customers and the service quality and accuracy of the bank have retained them. In addition to that the straight forward stance taken by the Metro bank and the service quality it has mixed with it has resulted in consolidating business in highly competitive UK’s banking sector (DataMonitor; 2010).
Though the UK banking sector is highly competitive it is in terms of competition between banks, but did not farewell to the customers. Hence, DataMonitor (2010, 14) expects the best way, the Metro bank serves its customers is to stir up the competition so that the customers can be benefited from that. The opening of Metro bank is a grand gala event, but switching of the current account customers to the bank would be a doubtful issue as the research of Data Monitor shows that only ‘11 per cent of the current account customers would switch their current accounts next year’ (DataMonitor; 2010), and all of them cannot be guaranteed to be the customers of Metro bank.
In addition to that the service issue publicized by Metro bank has received a setback online as the bank has no online presence and thus cannot offer online banking facilities as of in the beginning. As online banking is being made a channel in retail banking for customers to interact with the bank, the absence of that option has resulted in apprehensions, as customers perceived lack of interaction (DataMonitor; 2010).
However, as the service is being widely publicized by metro bank, they have offered online services in 2011 with Trusteer rapport secure browsing facility. The Trusteer rapport secure browsing has ensured the customers that their accounts are protected, and their online transactions are secure and the bank has experienced an exponential growth due to its accurate, efficient and friendly service to the customers. Though the bank has opened its first store in 2010 without online banking facility and by announcing that it will be introduced soon, it has made use of latest technology and mixed it with good business practices that put customer at the top (Stinchcombe 2010).
Credit Risk and Regulatory Hindrances
The increase of number of savings accounts with Metro Bank may result in available liquidity to the firm and it may help in credit risk. According to Crouhy, Galai & Mark (2005, p. 148) mention that the Banks’ regulators recognize that credit risk as the biggest risk and oldest as well. The risk is bigger than the expectable loss of the traders in capital markets, because the loss of traders is due to the market risks but the credit risk is due to the reckless lending policies of banks.
Hence, UK regulations posed a number of hindrances to Metro Bank and the bank has been compelled to show the adequate capital to absorb credit risk accrued if any in the future. The more the accounts and deposits, the more loans the bank can offer and this resulted in dominance or retail banking operations of Metro Bank in its operations and subscription to FSCS as well to reduce the estimated risk by regulator (Crouhy, Galai & Mark 2005, 194-199).6
Metro Bank’s Lending Capacity
The estimated risk by regulator forces a bank to show the more room it has to lend as per the proposals and Metro Bank has that. This could be evident from the details published in Business world. Business World Research (2007) states that the ‘loan-to-deposit ratio, in general is starting to pick up’ (Business World Research 2007) and this resulted in improving of asset quality of Metro Bank few years before it established itself in UK. Before entering UK, it is the largest lending bank in Philippines and loan-to-deposit ratio for the year 2006 is at 64 percent of the country’s lending market. This continued to grow and resulted in profits that reduce the credit risk estimated by the regulations when a bank tries to establish in a foreign country particularly like a developed country like UK (Business World Research 2007).7
However, a gesture from Metro bank that it is not prone to systemic risk, the interest rates for loans are higher and those of deposits are lower when compared to the competitors of Metro Bank in UK. This may be due to the intention to be out from systemic risk in which the banks who do aggressive marketing or the ones which offer the banking products for lesser rates (Saxton 2010). As a result the banking regulation in UK has been framed to avoid liquidity crisis faced by the banks and asymmetry in the maturity of a bank’s deposits (Cranston 1997, 72)’ and Metro Bank used deposit insurance cover to overcome the regulatory restriction regarding capital and liquidity (Cranston R: 21997, 69-73).8
The financial Situation of Metro Bank PLC while Entering UK
While considering the situation that granted permission for Metro Bank PLC to enter UK, it is necessary to go through the financial situation of the bank in 2009 when it tried to establish bank in UK in 2010. According to Metro Bank financial statement of 2009 released in 2010, it is clear that the loan capitalization is more than the operational expenses and it resulted in accrued profit before and after tax.
The bank has carried forward 45,489 million pounds of profit to the next financial year and this resulted in enough liquidity to start a bank in UK. In addition to that the asset-liability situation also is better for the Metro Bank PLC as total assets are more than total liabilities and current assets are still more than current liabilities, which is a clear indication of well managed financial situation not only through interest on loans but also through fees and charges that increased the profitability of the bank thus making it capable of protecting interests of the customers. In addition to that the total capital and cash reserves increased to 95,492 million GBP, which again indicated the enough liquidity, required to protect the deposits of the customers (Metro Bank PLC: 2010).9
As per the financial position revealed by the Metro Bank PLC, the position after 2009 resulted in 1295694 million GBP cash reserves for the bank in UK. Even the cash at bank when compared to short term bank deposits is better. The cash at bank is 545, 686 million GBP and short term bank deposits are at 750008 million GBP. This situation also can be termed as the one that gives good liquidity capability for the bank in the context of returning the deposits to the customers when they mature. The above explained situation reveals that the bank is accruing not only enough profits, but also getting enough short term and long term deposits to maintain enough liquidity that is necessary on daily basis (Metro Bank PLC, 2010). 10
The problem regarding changed functions and processes for banks in UK is about ‘terminal decline of commercial banks and their long=-standing deposit taking and loan functions’ (Shaw 2001, 1). Shaw (2001) draws the above conclusion from the fact that the share of commercial banks regarding total assets the financial institutions possess is on decline. However, it may not be an indicator of the decline of capability of functioning of commercial banks as the decrease in assets may be of non-productive in nature.
Another situation that enabled the big companies to borrow money from bond market for lower interest could be a potential reason for the banks to lose low risk customers who take bigger loans and have high credit rating (Shaw 2001, 1-3).11 Even in the above-mentioned situation, Metro Bank has seen conduciveness in the current environment of UK for new entrants. Robinson and Krommenacker
(2011, p. 6) explain that the current environment is conducive for new entrants as society wants change in the way banks function in UK. Only a minute percentage of customers in UK are satisfied with their bankers and only one fifth of the customers do recommend their bank to others. In this situation, Robinson and Krommenacker (2011) uncover the worst customer service according to the customer ratings. According to the survey done by them, 62 percent of customers of Satnander bank, 48 percent of Hibos bank, 41 percent of Lloyds bank, 41 percent of Barclays bank, 38 percent of Natwest RBS, 36 percent of HSBC, 28 percent of Nationalwide banks customers rated their bank’s service rendered to them as poor and they would switch loyalties if they find a bank that offer more efficient and swift services. Metro Bank PLC is banking on this situation of dissatisfaction of the customers by offering them swift service delivery and internet banking facilities and also making easy the issuing of credit cards.
However, the current regulatory arrangements in UK do not allow financial institutions or banks to fail, unless there are serious consequences. This is because, the regulation itself demands enough liquidity for the bank that makes it difficult to fail and allows only the banks, which have enough capital, profitability and liquidity that enable the organization to have long term goals. However, Robinson & Krommenacker (2011, p. 6) assert that, having enough capital is not enough to start and function a bank, but delivering the value to the customers is important and Metro Bank reformed its structure or rebuild that according to regulation for better governance of financial product delivery.
The hope of the Metro Bank that made it to start a bank in UK is that in addition to the retail customers, the commercial customers of the UK banks also are dissatisfied and they turned to Metro Bank when it has been established due to its extra service hours, extra week days and clear vision when compared to its competitors (Robinson & Krommenacker 2001, 1-6).12
The factors utilized by Metro Bank to Establish and Sustain
The significant aspect that helps to overcome operational difficulties for a bank like Metro Bank PLC is usage of informational technology in banking activities. However, even this aspect is limited utility for a bank in UK as the competitors are no less savvy towards the usage of the technology. Hence, it is necessary to use the technology more effectively than the competitors, matters in attracting the customers to the bank.
However, irrespective of the usage of the competitors the informational technology helps in ‘organizational restructuring and as a means of reducing costs by outsourcing the activities which are computer and telecommunications intensive and downsizing heavily investing in IT and streamlining the employment’ (Fernandez, Montes, Vasquez 2001, 46). In the course of restructuring like other banks in UK, Metro Bank PLC also looked for more efficient organizations with lower fixed costs. The bank also vied for greater flexibility in the organization to manage the outsourcing activities of the bank. In addition to that Metro Bank in has reacted in a way to rapidly improve profits by fee based business.
That means it has concentrated on income that can be obtained from fee based business of the banks. As a result, it has ‘ventured in high risk segments like securities derivatives’ (Fernandez, Montes, Vasquez 2001, 47). In addition to that the bank applied information technology ‘for aggressive price competition and to introduce product and process innovations’ (Fernandez, Montes, Vasquez 2001, 47) in the form of opening a savings bank account in 15 minutes and offering and printing of credit card in far less time than the competitors. Metro bank is trying to have competitive advantage in retail banking by offering product and process innovations (Fernandez, Montes, Vasquez 2001, 46-48).13
Regarding innovation in the banking products, banks in UK are more active in introducing guarantee cards in place of credit cards. The credit cards do offer a maximum period of 50 days to repay, whereas the guarantee card offers only four to five days repayment period. Hence, there is time to little innovation in plastic card products and thus Metro bank started identifying low to moderate risk individuals and started issuing cards to them in minimum amount of time possible. In addition to that Metro Bank PLC started issuing prepaid cards, which allows the customer to use it in the country of currency he/she deposited in the account for free, but charges a fee if the card is used in the country other than the deposited currency (This is Money 2011).14
The fee charged for usage of the prepaid card in the country other than the currency deposited may be less with Metro Bank PLC when compared to others and this could be termed as the one activity of the Metro Bank, which uses the fee based activities to increase income. This type of activities in the form of offering prepaid credit cards enable the customers to use them as electronic purses. In this manner, the Metro Bank PLC is offering cards that enable even small payments using cards ( Fernandez E, Montes J.M, Vasquez C.J: 2001, 46-48).15
The methodology involved in this paper is qualitative analysis as the topic is related to the causes and reasons for the difficulties in establishing and operating a bank in UK. As the topic is related to regulations and competition in the banking industry, the quantitative date can only be used as supportive for the reasoning and understanding done in the course of qualitative analysis. As part of the qualitative analysis the ways and means followed by Metro Bank PLC to establish itself in UK alongside the regulations regarding establishment bank have been considered. The information like licence for Metro bank from FSA (Wallop 2010) was found in newspapers like ‘The Telegraph and the related information has been found in authentic books and journals and reviewed according to the need of the topic that demands the discussion of the problems faced in establishing a new ban in UK and its sustenance in the competitive atmosphere.
The uncomfortable situation faced by Metro Bank for 18 months to prove its soundness to the authorities (Wallop 2010)16 has ended in March 2010 and the bank started its operations in April/May of the same year. In addition to the soundness of the bank, various promises made by the bank to the consumers to attract them from other banks have been part of the review. The analysis/discussion part will now concentrate on difficulties faced by Metro Bank and the way they convinced the authorities in UK and how the bank is performing withstanding tough competition.
The research focuses on service issue and thus the literature review has been focused on the service issues as well as the strength and safety of the banks in the context of putting the customer on the top and being subjected to global financial shocks. Hence, the ring-fence and structural isolation of the activities of the banks to put them in safe zone from being affected by global financial shocks have been reviewed. The effectiveness will be discussed in analysis/discussion section. Due to the method employed being qualitative the review and the research as a whole tried to find out the effect of service on consolidating business in competitive banking sector of UK and recording growth.
As Metro bank has registered growth within in a short period, in UK, its financial statements are studied to know the extent of the growth and the policies and incidents are analyzed to understand the ways and means followed by the bank to achieve growth. Most of the focus will be on the way the products offered to the customers and making them satisfied while competing with big banks in UK. In that course of research and analysis, the fees in banking and their effect on customer satisfaction and the context that prompt the customers to make use of accounts, products and services of the banks, which charge slightly higher than their competitors for good service have found place in discussion.
The discussion has been based on findings drawn out from the responses of people as well as the records of banking sector and Metro bank and news paper articles that reported the growth of the bank. The findings were also drawn from financial statements of the bank and are analyzed with contemporary methods that are prevailing in banking sector in UK and other countries and how the service affected the banks positively will be found.
Metro bank and its establishment in UK
The establishment of Metro bank in UK has resulted in opening up a way for new entrants into UK’s banking sector dominated by larger banks. Due to the domination of larger banks, and regulation effect, it has been difficult to show enough capital and to establish a bank that can dominate or compete with larger banks in UK to sustain and grow. However, the establishment of Metro Bank has unleashed the wave of new type of banking. Despite the competition, Metro bank launched its stores in UK and is confident of facing the competition from larger banks in UK, which dominated the country’s banking sector for decades.
However, Metro bank has found that 2010 is the right time to enter UK as customers of the banks feel that the financial crisis is due to the existing major players in banking sector of UK. In addition to that, Nielsen reveals that the customer satisfaction in banking sector of UK is poor and Metro bank is banking on that factor to attract customers to its bank. Taking a cue from the establishment of Metro Bank Aldermore, which is in business lending, is trying to establish itself in UK and to throw a lifeline to small business.
Metro bank financial performance
Keeping its performance up to the mark it has promised while opening, Metro bank has grown exponentially in 2010 when compared to its financial performance in 2009. The financial statements released in December 2010 states that, within six months of establishment, the interest income of the bank reached 196000 GBP. However, being a new entrant, the operating expenses still higher than income and the bank has reported a loss of 23572000 GBP in December 2010. However, the bank stays healthy with cash and balances with Bank of England being at 48436000 GBP and loans and advances to banks and customers amounting to 4499000 and 116000 GBP respectively.
However, the assets, which are 119117000 GBP, which are higher than total liabilities of the bank, which stand at 22327000 GBP, provides an opportunity for a new entrant like Metro bank to perform well by attracting new customers. In addition to that, Metro bank is having sufficient liquidity with ‘reconciliation of profit before tax to net cash flows from operating activities lying at 23386000 GBP by December 2010 (; 2010).
Banking Regulation in UK and Metro Bank
The analysis of the Metro bank in UK will be on its soundness shown to FSA and how it is using that to attract customers without compromising on the charges levied on the customers when compared to the competitors. As the management believes that the customers are ready to pay a bit extra than their present bank if the charges are transparent and the services are good. In this regard, it is necessary to mention the financial strength of the Metro Bank by recalling that it raised P5billion in tier 1 capital and its capital adequacy ratio is 15 when compared to 10 of its competitors in UK.
That means it has the capital more than the percentage that its competitors normally do have while baking in UK (Torres T.P; 2010).17 However, according to Basel III requirements framed in September 2010, capital ratio is 4.5 percent plus buffer of a 2.5 percent, which will be equal to a capital ratio of seven percent. However, normally banks in UK maintain a capital adequacy ratio of 10 percent, but the Metro bank put it at 15 percent and it indicates the financial soundness required to start a new bank in UK (Financial Times Lexicon 2011).18 The maintenance of these rations is to make a bank resilient enough to withstand the financial shocks so that it can safeguard the money collected from the customers in the context of financial meltdown and the loan takers are not in a position to repay immediately.
The adequacy of capital that is denoted by Capital Adequacy Ratio or Capital Ratio helps the bank to pay for the depositors even if the loan account holders do not repay in time or if the bank is having non performance assets more than the prescribed limit. Being Philippines largest bank in terms of turnover and deposits, (Ackermann 1998) Metro Bank is able to mobilise the cash reserves necessary for starting a bank in United Kingdom.In addition to this, the swiftness in opening accounts and giving bank cards has resulted in opening of 500 new accounts in the opening month of the branch in Croydon (Metro Bank Reaps Benefits for offering Good Customer Service 2011).19
Metro Bank and its Services, Fees, and Charges
The opening of innumerable number of accounts every week and every month and in every new branch does not seem that the bank is offering highest interest rates on deposits or offering lower interest rates on loans. In a podcast that broadcasts and interview with the Chairman of Metro Bank Anthony, the interviewer questions Anthony that the bank is not having a best interest paying account nor a best loan account that levies less interest.
Banking fees and comparison
To compare and contrast the findings and review results as well as performance of Metro bank from its service point of view, the banking fees need to be mentioned. As per the observation of BBC (2010), ‘only nine per cent of EU consumers switched accounts in 2007 and 2008 when compared with 25 per cent of car insurance consumers’ (BBC; 2010). That means the car insurance customers are looking for new insurers than the customers looking for banks. However, another finding that reveals about letting down of current account consumers by retail bankers brings to the fore the charges and fees being levied by banks.
According to ICB findings ten per cent of banks have no price information at all on their websites leaving the customers in disarray regarding the charges levied on the services. Out of 27 countries perused by the commission, UK ranked 17th most expensive country regarding banking charges, which can be considered as being expensive to the size of its economy. The increase of economy should decrease the banking service related charges and it seems it doesn’t happen in UK due to the accumulation of majority of business in five or six large players in banking industry. Most of the banks in UK charge the customers for specific services and the new entrants like Metro bank can offer the same service more accurately with lesser charge than the banks used to charge previously.
BBC (2010) mentions a report by UK office of fair trading (OFT), which in July 2008 revealed that the ‘personal current accounts of customers are not working well’ (BBC; 2008) in UK. Even then the customers are not willing to switch their accounts as they find all the banks doing the business in the same manner. The above-mentioned situation can be used by Metro bank to prompt the current account customers of other banks to switch their accounts by offering a more functional current account with less charges than its competitors (BBC; 2010). This strategy of getting enough customers for the bank is due to the inability of other banks to give loan to small business operators (Kuo 2011).20
In addition to above deals, Metro Bank after one year of establishment has strategies to hold on the customers it attracted during first year of its opening. It released zero percent master card deal, which would be give the existing customers a free balance transfer, but charges three percent for new customers. This offer or scheme sends a message that the concessions offered by the bank would only give to the existing customers and new customers have to pay. If the offers are reasonable and substantial, the customers stick to the bank and want to utilize the products and concessions of the bank. As this credit card is connected to current account, Metro bank could have enough current accounts with it and this will increase the chance of high paying business customers into the ambit of the bank. This is because the business customers who have a current account and a credit card with the bank would guarantee a customer with a best bank account and a good credit card (Which? 2011).21
In addition to the schemes of above-mentioned type, Metro bank also eyed loan customers from SMEs. They could also be source of customers with current accounts. To attract SME customers and give them business loans, Metro Bank is offering SMEs the access to business banking manager. Normally other banks do not allow this but Metro Bank is offering the above-mentioned offer not only for SMEs of 50 to 250 employees but also to the businesses which have 10 employees and above.
Moreover, the competitors of Metro Bank consider the businesses having less than 10 employees as moderate risk customers and do not offer a business loan, but Metro bank offers them though at a bit of higher interest than the competitors. The higher interest is being accepted at present by the business operators as they are not able to get a reasonable business loan from banks other than ‘Metro’. Before the arrival of Metro Bank 29 percent of larger businesses managed to get a loan after applied for it and this only two percent in the context of micro business operators. This made the micro business operators to look for a bank that can cater to their needs and Metro Bank is doing that (FX-MM 2011).22
Ways and means of Metro Bank operations
Explaining about Metro bank, Vermon Hill said to Simon B (2011) that it is the good service the customers want and that is poor in banks in UK. Hill V says that their bank banks on the above point of poor service offered by big banks in UK and the way they do not cater to the needs of small businesses. Metro bank is bigger enough to meet the needs of the any type of customer and at the same time is small enough to address the needs of small business operators whose needs are not completely catered by other banks of size of Metro Bank (Barry 2011).23 Hence, according to Hill V, Metro bank relies on the service offered to customers by their staff and is getting enough business to sustain.
This has been revealed again in Financial Times (2011) as the author praises the way the bank operates. Instead of glasses and counters separating the staff and the customers, all the processes from account opening to getting a loan or a credit card, will be done on the desk and this makes customers feel important and it is difficult to listen a ‘no’ from the staff regarding the service requests by the customers (Financial Times 2011).24
In this regard Cardno A (2011) mentions Metro Bank’s CEO Donaldson’s words about the bank’s strategy, which calls its branches as stores. Donaldson reveals that the strategy is to open the bank’s stores in ‘high-density areas, to get as many people as possible to pass the bright blue and red lights of its logo shining through the glass frontage’ (Cardno 2011). In the one year period in UK, Metro Bank managed well in ‘planned expansion of mortgage and commercial markets. He believes that the risk is being minimized due to the decision making of the banks while lending using the previous experience and at the same time acting according to convenience of the customers (Cardno 2011).25
Performance of and opportunities for Metro bank in UK
The Metro bank being just less than two years old in UK, despite its exponential growth did not reach breakeven in 2011. It hopes to breakeven and expects to start earning profits in 2013. One year after establishing in UK, the bank has opened 25,000 accounts and by July 2011 is opening 1000 accounts a week and is expecting to reach a total of 1,00,000 accounts in by 2012. As per the expectations of its vice chairman Vernon Hill, the bank may breakeven in 2013. In the banking sector of ‘UK dominated by Barclays, HSBC and Royal Bank of Scotland, the Metro bank is seeking to achieve breakeven’ (Gupta 2011).
Though the bank did not get breakeven in 2011, it could be termed as good performance as it achieved the targets set by management regarding accounts and loans. As management hoped to reach ‘around the breakeven level in two years time’ (Gupta 2011), the real breakeven could take two and a half or three years. This performance may be due to the effective service offered by the bank as the charges levied by the bank are not attractive and its rivals are offering the same products and services at lesser prices. However, as most of the banks in UK are not functioning up to the expectations of customers, ,mostly regarding current accounts dealings, substantial number of customers are resorting to open accounts in Metro bank (Gupta 2011).
To find the reason for the rapid development of accounts and customers to Metro bank it is necessary to review the distribution channels in the bank. Nicolae (2010, p. 1086). The different channels are ‘branches, contact centres, ATMs and online channels, portals and web banks’ (Nicolae 2010). Though the branch is most preferred channel of the bank for the customers, the satisfactory and effective as well as efficient services offered online on the products of services can reduce the visits of customers to banks. Hence, the lesser visits of customers to branches, the better the effectiveness and efficiency of online banking services of the banks and Metro bank is trying to do so to ward off the competition from bigger players in UK’s banking sector and that strategy seems to be fruitful till now.
Overcoming all the existent channels in the banking sector, Metro bank named its branches as stores and projects its employees as storekeepers who serve the customers up to their satisfaction. The service delivery will be swift as well as the investment advices. Though the service delivery of Metro bank has been proved and has been evident with the number of customers (weekly 1000) turning to the Metro bank stores to open accounts, the satisfaction of them regarding investment services of the bank will be evident only after breakeven and sustenance of growth of the bank (Nicolae 2010).
Service and relationship
As the Metro bank counts on swiftness in service as well as customer satisfaction, it is necessary to consider the relationships between ‘service quality, perceived risk and customer value’ (Chang & Tseng 2010, 347). As per the findings and analysis till now, the customers in UK are vying up to open account in Metro bank, the empathy of service quality matters. The reason is that it affects the emotional value of the customers as in UK the trustworthiness as well as user friendly nature of the bank staff also matters. Explaining about the role of bank staff, Chang & Tseng (2010) mentions the role of managers who can ‘identify the special critical cues like tangible service quality, the customers evaluate the social value of a product or service’ (Chang & Tseng 2010) positively.
As the accounts of Metro bank in UK are increasing 1000 per a week in highly competitive banking sector and that too for a newly established bank, it can be understood that the customers perceive less risk with Metro bank and causal relationships between bank and the consumers regarding service quality are being maintained good. The important causal relationship is about information the buyers or the customers of banking products and ‘services seek to make choices based on inferences from the informational cues available to them’ (Chang & Tseng 2010, 348). Hence, the stimuli used by the customers to define the service quality of Metro bank are important (Chang & Tseng 2010).
Though there is no online presence for Metro bank at the time of launching, it has kept its word of launching it soon and done it with advanced technology that ensures swift and safe services for the customers. The introduction of online banking services has resulted in increase of customers who want their accounts switched to Metro bank from other banks. Moreover, Metro bank was successful in advertisement of its service regarding its financial products. That means, the advertisement it has given to the customers by mentioning its branches as stores arose enthusiasm in customers regarding its services and products and the swiftness and the quality of service as well as financial advice made them not to bother about the service charges, which are a bit more than its competitors.
Hence, it can be understood that, even in the heavily competitive banking sector in UK, which is lethargic enough, the active new entrant like Metro bank has secured a place in the minds of customers through quality of service and swiftness in its delivery irrespective of the high fees charged for the services. As of now, Metro bank has proved that the comparatively higher fees will not deter customers from switching to the bank provided the service is better than the competitors.
One of its strength is that the Metro Bank is operating on a retail model in contrast to classic banking model followed by its competitors (Murray 2011).26
As Metro Bank follows retail banking instead of classic banking followed by its competitors, it is necessary to discuss ways and means of it. In this regard, Baumann C, Burton S & Elliott G (2007) explains that the ‘relationship between satisfaction and loyalty’ is necessary (Baumann et al., 2007). In this regard Metro Bank follows the Bloemer and Peeters (1998)’s research cited by Baumann C et al., (2007), which reveals that maintenance of good service quality ‘has an indirect effect on loyalty via satisfaction, and that satisfaction has direct effect on loyalty’ (Baumann C et al., 2007). Keeping the above fact in view, Metro Bank is focussing on quality in customer services offered through its products.
Though the rates of some services and products are more than its competitors, the Metro Bank is banking on its service quality that is superior to its competitors and this has been evident as the management found ‘good evidence for a relationship between customers’ attitudes and intentions’ (Baumann C et al., 2007) in retain banking if offers to the customers in the UK (Baumann, Burton & Elliott 2011).27 Though Metro Bank has been successful in its old-fashioned, swift services, aggressive marketing of its products in the first year of its entry in UK, there is a long journey for the bank to breakeven and to stand at par with its larger high street competitors in UK (Temenos: 2010).28
Metro Bank’s entry into UK has been propelled by its raising of capital that is sufficient according to Basel III norms and due to enough liquidity it has to absorb the credit risk as well as unforeseen losses. However, the management of Metro Bank is thinking differently than its competitors and is selling its products in its stores (branches) in an aggressive style of marketing with the help of good and swift services offered by its staff. The Bank’s strategy is to follow retail banking and to open as many accounts it can and to offer as many credit cards or loans to the customers who are not bothered by bigger banks until Metro Bank entered UK. This resulted in a huge footfall into the bank in the form of customers as the stores of the bank are innovative and provoking enough the customers to open an account, to get a card or to get a loan as per the credentials they have.
It could be concluded that the service matters in case of a bank trying to establish in a market completely new to it and highly competitive. The Metro bank has proved that the customers of a bank afford the comparatively higher services charges when the services are satisfactory and quality products are offered. The important factor is to offer quality services as well as products and the message should be delivered efficiently and the functioning should be innovative. Moreover, the customers also valued the safe, secure and effective banking services of Metro bank when compared to non-functional accounts of larger banks, which do not valued majority of customers.
- As the Metro Bank is following retail banking model it is necessary to monitor the clients who take loans continuously.
- The operational risk for the Metro Bank is high when compared to its competitors as it decided to offer small business operators who are ignored by its competitors. As a result, it is necessary for the management to be careful about the credit and liquidity risks as the loans are at more risk than its competitors.
- The anticipated liquidity risk need to be compensated with the fees charged for different types of customer services offered by the bank. For example, it offered a credit card with no extra charges and other facilities that have a current account with it and prompts them to spend overseas and offers free withdrawals in ATMs overseas. This encourages the customers to open the accounts with Metro Bank and pay for the services they utilize form them and this could compensate the anticipated losses from moderate and average risk customers who take loans from the bank.
- The Metro bank has to work to get breakeven as per the schedule.
- The reason for this recommendation is due to the fact that without achieving breakeven sustaining the growth or delivering the services effectively without profit is not possible for a long period. As the bank has set two to three years as the breakeven period, the future would be good if the breakeven has been achieved within that time frame.
Efficient investment advice and flexible products need to be offered to the customers in UK by Metro bank.
As per literature available and findings extracted, there is not much available about offering investment advice or about the flexibility of products to the customers. However, it seems the bank offered the same services available with other banks more effectively and thus attracted customers. If efficient and accurate as well as valuable investment advice can be provided, it would be better for the future prospects of the bank.
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