Also on 14th January, the Co-Operatives Movement held a conference in Manchester on "Ways Forward" in the light of problems in the Co-Op Group and in particular the loss of the Co-Op Bank.
I've used that term carefully. "Loss" is exactly how it is seen by the Co-Operatives Movement. I attended that conference, and what struck me above all was the pervasive sense of grief, hurt and betrayal. The Co-Op Bank is no longer a co-operative or mutual. It is simply a public limited company which is 30% owned by a co-operative, the rest of the shares being in the hands of a variety of investors ranging from pensioners to hedge funds. Even though it has successfully been rescued, to the Co-Operatives Movement, the Co-Op Bank is lost.
To be sure, it was not actually a co-operative prior to its rescue, either. But it was wholly owned by a co-operative. It is the loss of that sense of ownership that has upset the Co-Operators.
There seem to be a variety of reactions to this. There are still a few diehards who think that it should have been bailed out by the government and restored to mutual ownership. And there are even one or two who think that the original proposal should have gone ahead, even though it was terrible for small investors, because it would have preserved 100% mutual ownership. But judging by comments at the conference, these are now in a minority. Most people accept that a government bailout was never going to happen - under a government of any colour - and that in the short term at any rate a private sector rescue was really the only viable option. Beyond that, opinion polarises. Some people are determined to "save their bank". But others want to write it off and move on.
John Mann MP, in a fiery speech, said categorically that "The Co-Op Bank is dead". And in one respect he is right. The Co-Op Bank is indeed dead, as far as the Co-Operative Movement is concerned. It is not a mutual, and in my view it is unlikely ever to be in mutual ownership. To their credit, the campaigners at "Save Our Bank" are trying to raise the funds from customers to buy out the private sector owners. But since the customers of the bank (unlike the Group) are not, and never were, its owners, it seems unlikely that they will want to place their money at risk to "restore" a mutual status that it never really had.
So those people who want to write it off and move on are right. There are many other financial institutions out there that already operate on mutual principles, and many more could be created. The Co-Operatives Movement really doesn't need to tie itself to the past. It should learn from this experience and move on.
But what does the future hold for the Co-Op Bank itself? John Mann didn't just mean that the Co-Op Bank was dead to the Co-Operative Movement. He meant really dead, in that he thinks it will actually collapse. I disagree. I think it will most likely continue as a small private sector retail bank.
The present situation is that the Co-Op Bank is shrinking. Britannia Building Society is at last being integrated, eliminating idiotic duplication of branches and even head offices (yes, Britannia still has its own head office!). And the Co-Op is trimming its operations back to plain vanilla retail deposit-taking and lending for households and SMEs. It is no longer going to provide banking services to large corporations. Clearly these changes are going to mean considerable job losses. And they have other implications too.
Historically, the Co-Op Bank has provided banking services to large public sector bodies, notably local authorities and housing associations. In the 2013 interim accounts, these suddenly appeared in its "Non-Core" division. Now we know about "Non-Core" divisions: all the banks that were damaged in the financial crisis have them. They are dumping grounds for assets and business lines that are no longer seen as "strategic" and are therefore marked for sale or wind-down. So it seems that the Board of the Co-Op Group decided even before the private sector rescue that the Co-Op Bank would no longer serve larger public sector bodies. Blaming hedge funds for this decision is wide of the mark. This is a decision by Co-Op Group management.
The Co- Op Group has also decided to replace the Co-Op Bank's IT architecture. The amount of money allocated to this is pitifully small for a complete system replacement - only £500m. Clearly they are going for a simple, no-frills solution, seemingly with considerable emphasis on digital and on-line provision (more on that shortly). This might explain why they have decided to end banking services for larger private and public sector bodies. Large corporate banking services are far more complex than household and SME banking services. In short, they are expensive.
But I don't think that's the only reason why the Co-Op Group has decided to end banking services for larger corporate customers. I think the real issue is competition. It cannot compete with larger players, and particularly with investment banks, for the lucrative corporate market. It could go into partnership with an investment bank, as some other small providers to the large corporate sector do. But this would be to miss a major opportunity. The Co-Op Group has an astonishingly loyal customer base, not only in its bank but also in its retail services. It looks as if its strategic aim is to persuade many of those people to use its banking services as well as its supermarkets and pharmacies. Leveraging the loyalty of its customers in this manner is similar to the strategies adopted by other "retailer" banks such as Tesco and Sainsbury's. It does mean that the fortunes of the bank will depend on the performance of the retailer, but this is perhaps no bad thing. After all, the Co-Op Group management are not going to want the bank to get into difficulties again, so it might encourage them to manage their retail services with more of an eye to the interests of their members. This is really the key objective of the Myners review.
The Co-Op Bank's focus on SMEs is clearly an attempt to align itself with the Government's objectives of increasing SME lending and improving competition in the sector. Concentration in the SME lending market is viewed as a problem. RBS was formerly the market leader (40% of the SME lending market in 2007), but its under-performance since its nationalisation creates opportunities for other providers to step in. And SME lending still attracts a funding subsidy (FLS). All of these are no doubt key drivers for the Co-Op Group's decision to focus on SME lending. But it should be welcomed. After all, we need more banks that are willing to lend to SMEs.
What is perhaps more worrying is the Co-Op Bank's new-found love of digital banking services. Online banking is considerably cheaper to run than branch-based, but the competition is becoming cut-throat, and the Co-Op Bank has limited credibility in that marketplace because of its historic IT problems. And its loyal customer base includes a fairly high proportion of people who do not or cannot use online or mobile-phone-based services. Branch networks are expensive to run, but I wonder if this is possibly a strategic error. The Co-Op Bank might do better to look at providing banking services within its existing retail outlets, rather than trying to move into an increasingly crowded digital space. Following the herd doesn't make for a distinctive offering.
For better or for worse, the Co-Op Bank as we have known it will be no more. It will become a small private sector retail bank, mainly serving online and telephone customers from its associated retailer but with a focused SME lending franchise as well. Its association with large corporations and public sector bodies is over, and it seems its association with trade unions is too: it was announced on 13th January that it is selling its stake in Unity Trust Bank. I wonder how much longer it will retain its political affiliation with the Labour Party.
And I also wonder how long it will keep its name. The Secretary of State is still to decide whether a private sector bank can be called "co-op". It may be that he will decide that the name must be changed. Personally I would agree with him. Losing its name would enable both the Co-Operatives Movement and the bank itself to move on. So maybe it is time to say goodbye to Co-Op Bank. Welcome, Britannia Bank?
Under the Radar
The "ethical" Co-Op
Stand By Your Bank
The lure of gold, the deceit of silver
In praise of hedge funds - Pieria
The plausible executive and the ruined bank - Pieria
Who should run banks? - Pieria
Hat tip to Richard Murphy for suggesting the new name.