Time to say goodbye, Co-Op Bank edition

On 14th January, the Board of the Co-Op Group approved the Terms of Reference for an independent review of the governance of the Co-Op Group. The review is to be led by Lord Myners, who was appointed to the Board as an independent director in December with the remit to conduct such a review. This is now the fourth review of the Co-Op's problems, the others being the Kelly review of the circumstances of the Britannia takeover, the Treasury Select Committee's inquiry into the circumstances of the Verde deal collapse, and the Bank of England's forthcoming enforcement investigation into the conduct of the Co-Op Bank. And the Chancellor of the Exchequer has announced that there is to be yet another independent inquiry. I do wonder if this is overkill. There is only so much navel-gazing a company can stand. In the end, they have to get on with being a business and providing a service to their customers and, in this case, their members.

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?

Related reading:
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.


  1. Misleading heading - I thought you are ending your blog!

    1. Hehe. I did think a few people might misunderstand the heading! But it was just such a good title - and it meant I could put in a musical clip!

  2. Hello Frances

    I'd like to pick up on the point you've made about the Co-Op encouraging its customers to use its other services in the same way eg Tesco and Sainsbury's have.

    To my mind there is a crucial (and sadly, perhaps fatal for the Co-Op) difference between the Co-Op's ability to 'leverage' its customer loyalty and eg Tesco's.

    Tesco started out as a supermarket, pioneered the use of a customer loyalty card to harvest data about its customers in order to perfect not only its supermarket offering (whatever one may think of the ethics involved, only a fool would deny that until very recently Tesco were a very clever operation in this regard), but also to cross-pollinate its banking and other businesses.

    The Co-Op, on the other hand, has never been particularly good at anything, (its Dividend card notwithstanding) other than holding fast to its ethical commitments upon which its customer loyalty depends. If Tesco had to dump, say, it's credit card division, it would still be a viable business as a supermarket, whereas there is no one division of the Co-Op that excels in the same way.

    And therein lies the rub. If the Co-Op loses its ethical sheen, the one thing that made its customers loyal, why would they stay faithful? Its supermarkets and other services, are essentially as pricey as M&S or Sainsbury's, but without the wide range of goods (and until recently, no delivery service). It lacks the cachet of Waitrose.

    It saddens me to say this - I'm precisely the sort of ethical lefty upon whose loyalty the Co-Op depends - but I think there is a real danger of the whole lot going under because if one stands back it makes no sense as a business without the glue of a shared ethic to hold it together.

    1. Hi Anna,

      I completely agree with you except for the penultimate paragraph. The Co-Op is mediocre across all its business lines. If it were a commercial business, its fate would be the same as Woolworth's - a mediocre business with no clear strategy or purpose, which died in the recession as such businesses do. But I think the Co-Op could just carry on bumping along the bottom and relying on the loyalty of customers who believe in its "ethical" image and co-operative principles. As far as I know no-one is suggesting that the Co-Op Group is abandoning its ethical principles, and from what I saw at the conference it still has the full support of the Co-Operators. The ethical principles are being written into the bank's constitution with the full knowledge and consent of the hedge funds, who have of course realised that losing the ethical lefties would be catastrophic for the business. The bank does risk losing customers because of the change of ownership. But will the whole thing fall apart? I don't know. One thing is clear, though - if it does stay together it will be due to ideological support, not because it is a good business. Sadly.

  3. "I wonder how much longer it will retain its political affiliation with the Labour Party."

    From Labour's perspective "forever" as they owe them a tonne. What happens if some other hard-nosed owner wants their money back? If the Tories let it collapse does that force the issue?

    1. It is not the Labour Party that would decide, but the Co-Op Group Board - influenced of course by the new owners of the bank. If all they want to do is unload the Labour Party's debt, they can of course sell it. The overdraft would be more of a problem, but rolling credit facilities can be terminated. And political ties can be cut unilaterally.

      By the looks of it the "Tories" have no more intention of letting the Co-Op collapse than the Labour party has.


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