Metro Bank PLC is the first bank that has been established in the UK for more than 100 years. The bank entered the UK in the backdrop of tough regulation in the backdrop of the crash of Lehman brothers but banks on the customers who are ignored by high street banks in the UK and the quality service they are lacking until now. To face the stiff competition of its competitors, Metro Bank adapted the retail banking model, which offered old-fashioned banking with swiftness in service delivery using 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.
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
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 A; 2011, 101). This may be a strategy to attract younger customers who are eager to be incharge of their financial destinies.
This is because Metro bank is trying to rely on non-linear model of revenue generation by the methods like ‘pick and choose’ (Gritten A; 2011, 101) scheduling. In that way, the bank is thinking about new models, products and services for younger generation. The younger generation the bank is targeting are wealth holders also but may be permanent debtors of tomorrow. The company offers online services as the younger generation prefer to use them and thus the banks’ online activities are real and genuine and are capable of offering new and innovative products in an efficient way. The Metro Bank is trying to make the PCs or Macs of the young people as their bank counters so that the laborious work for bank staff and the time taken to come to the bank to the young customers could be saved. Metro bank is following the above-mentioned strategy as the orderliness in UK household finances is a bleak picture at present and the bank is offering the innovative products and services anticipating a good future and thus attracting younger customers to have them for a long time loyal to the bank (Gritten A: 2011, 101-103).2
Smarter than Competitors?
By offering innovative, fast and digital services extra smartly than the competitors, Metro bank is trying to gain the trust of the customers and to create a macro environment based on technology and eccentric banking. The information technology will be mixed with extra working hours and speedy response to customers’ queries create a feeling in younger customers that the bank is taking care of them. The above-mentioned attitude of Metro Bank is to consolidate its market among younger customers (Metro Bank’s: 2010, 223) but it is not so easy under the current banking regulations in UK and the bank found it difficult to establish in the country as it is a new banking establishment in the last 100 years.3
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 C (1999, 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 C: 1999, 11,12,114).4 One such issue considered by the banking regulations is capital adequacy of the bank that decides its capability of catering to the needs of the customers. In this regard regulators consider market risk, which is the ‘risk of losses in on-and off-balance-sheet positions arising from movements in market prices/rates (Herring R & Schuermann T: 2005, 16). Regarding bank, the above-mentioned risk can be considered as ‘Asset liquidity risk’. If the bank is ‘unable to unwind a position in a particular financial instrument at or near its market value because of a lack of depth or disruption in the market for that instrument (Herring R & Schuermann T; 2005, 16)’ it will be difficult for that organization to establish a bank in UK or in European Union. As ‘Franklin National Bank, Bankhaus Herstatt, Barings Bank, Piper Jaffray, Banesto, Credit Lyonnais, Daiwa Bank, Long Term Capital Management, and Allied Irish Bank (Herring R & Schuermann T; 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 R & Schuermann T: 2005, 15-16).5
Risks and Regulative Hindrances
In addition to the above-mentioned risks, the regulations 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. Due to the above-mentioned risk, the bank which wants itself to be established in UK needs more capital requirements than in the past. In this regard, the regulators use bank internal models, which result in shortcomings. To overcome these shortcomings buffer stock capital requirements for credit risk need to be estimated accurately. This estimation could be done using internal credit risk models. The important problem lies in depositor safety nets, which compel banks to fund cost subsidies to reduce internal buffer stock capital allocations. After funding cost subsidies and reduction of internal buffer stock capital allocations, it would be difficult for any banking organization to ‘satisfy a regulatory capital requirement based on an internal model (Kupiec P; 2005, 147)’.6 A bank that is established satisfying the above-mentioned conditions has to strive hard and offer new products and deliver them more swiftly and in innovative ways.
As it is not possible to offer higher interest rates on deposits and lower interest rates on mortgages, the Metro Bank offers seven working days a week and 12 working hours a day. In addition to that one can open a savings account within 15 minutes. Moreover, it want to sells its services as products and is calling its branches as stores. This is because, it offers public toilets, lollipops for children and biscuits for dogs. This is due to compensate the loss of profits or income during the tough time and to keep customers loyal and spending and this resulted in Metro Bank to rethink about its strategies. This is due to the fact that the banks have no more space to compete on interest rates and thus are competing on the ways and means of delivering their service products to their customers. 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 NT (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 NT: 2010).7
In this regard, Metro Bank Vice Chairman Vernon Hill states that the bank’s focus will be on the customers and they concentrate on both retail and business customers. They want to do the right thing for them but not at what price it has been done as the customers will be ready to pay more for a quality service comparable to other banks. Their target is to offer better banking service to the customers instead of offering them competitive prices and thus target the wealthier young customers, who can be maintained loyal for a long time in the future if the services of the bank satisfy them. 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 (Anonymous: 2011).8
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 M, Galai D & Mark R (2005, 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. This compelled Metro Bank PLC to comply with regulations by being a part of ‘financial services compensation scheme’ (fico.com), which reduces the risk of customers losing the money in case of insolvency of the firm. This act of the Metro Bank might have increased the chances of getting permission to establish itself in UK.
In addition to that the current regulations in UK regarding establishment of Bank assume that ‘a loan to a corporate counterparty generates five times the amount of risk as does a loan to an OECD bank, regardless of their respective credit worthiness’ (Crouhy M, Galai D & Mark R; 2005, 198-199). Hence, the firm also should show the available profit or liquidity to absorb the risk calculated by regulations and Metro Bank PLC has done it. Even more hard regulation is about the assumption of the regulator regarding corporate borrowers as they consider them as the ones who pose an equal credit risk like retail customers. Hence, the credit rating of ‘AA-rated corporation requires the same amount of capital as a loan to a B-rated credit’ (Crouhy M, Galai D & Mark R; 2005, 199). Hence, the number of corporate customers did not allow the Metro Bank to show the reduced risk to the regulator and thus focussed on retail customers regarding accounts, deposits and loans. 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 M, Galai D & Mark R: 2005, 194-199).9
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 (2007) states that the ‘loan-to-deposit ratio, in general is starting to pick up’ (Business World; 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: 2007).10 In the era of liberalization, ‘paradoxically the legal regulation of banking and finance has been tightened significantly’ (Cranston R; 1997, 68). This is due to the fact that the financial liberalization increases the risks for banks as they market aggressively and it may result in investor or customers’ losses, if it faced insolvency. Hence, the banking regulations in UK are tightened to avoid smaller financial institutions entering banking industry. One more aspect is the ‘convergence’ put forth by European Union, which authorizes the banks in ‘one member state to establish branches and provide services in other member states’ (Cranston R; 1997, 69).
This understanding between European Union member states makes the way easy for the banks operating in EU member states, but tightens the regulation for the banks in other countries. As Metro Bank is a Philippine based bank, the ‘convergence’ aspect has not been applicable to it and it followed and complied with all strict regulations about capital and credit risks from banking regulator in UK. Moreover, the prudential banking regulation has been a result of crises and looming of large systemic risk. Hence, the banking regulation considers the protection of depositors in the context of default by individual institutions. The large systemic risk could pass from institution to another in the case of default of a bank. Hence, systemic risk is different from credit, market and political risks faced by banks. To avoid systemic risk, it is necessary for a bank like Metro Bank to be monitored by regulator in UK and this results in strict compliance with the rules, which may pose obstacles for aggressing marketing of banking products in UK industry. However, a gesture 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 K; 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. Hence, the regulation in UK proposes that the new banks to be established ‘are prudently run, with adequate capital and liquidity (Cranston R; 1997, 72)’ and Metro Bank used deposit insurance cover to overcome the regulatory restriction regarding capital and liquidity (Cranston R: 21997, 69-73).11
Market and Operational Difficulties
Though there is insurance cover for the depositors, the problems for establishment of bank in UK don’t end as the regulation is tight regarding large capital flows, which is easier for the banks that have presence in European Union member countries. As Metro Bank PLC is a Philippine based bank, the movements of capital flows could be made easier if the bank has branches in other EU member country. Hence, the operational difficulties or hindrances regarding capital flows of Metro Bank could be made easier if the bank establishes branches in other EU countries. If it did not do so, it may find it difficult to compete with the banks, which had their branches in other European member states. Though the scope for risk taking and leverage has been increased for banks just before the era of liberalization, the new regulations are regarding controlling of different risks posed by banks and its customers. The regulation considers the protection of customers’ interests, which force the banks to offer deposit insurance, which is a costly affair and Metro Bank is offering such scheme.
This may result in decrease of profits and it needs large customer base both in deposits, accounts and loans to increase the overall profit earned by the bank. However, Metro Bank would lend more aggressively but may not for corporate customers as it may be forced to say no for them keeping in view the interest controls on large loans. Hence, the bank introduced speedy issuance of credit cards, fast opening of savings bank accounts, which allow the bank to earn more from short term loans and to have enough liquidity through low interest deposits such as savings bank accounts. In addition to that it seems that Metro Bank is following the policy followed by banks in liberalization era, which prompts them to give loans to SMEs and individuals for a greater interest than the interest collected from corporate borrowers. Giving loans to large number of SMEs and individuals ensures bank the profitability it needs but may result in crisis if the borrowers do not repay. Hence the banking regulation insists on collateral security for loans and this may decrease the credit risk of the banks. However, as the estimations of risk of regulator will be greater than that of the banks, the capital availability and profitability of the bank should be greater to establish itself in UK (Goodhart C & Hofmann B: 2007, 115-119).12
The obstacles to capital availability and profitability is due to the high concentration of deposits and new entrants in banking industry find it difficult to find funds for functional activities. The high concentration of deposits in banks of UK even resulted in anti-competitive behaviour. This anti competitive behaviour even resulted in profits for the banks at the expense customers. This not only affected negatively the prospects of customers, but also created hindrances for new entrants as the profitability in UK banking industry is very less. However, Metro Bank PLC, which has been a new bank since 100 years in UK, has identified the ingredients of change. Hence, this act of establishment of new bank in the form of Metro Bank PLC in UK can be termed as representation of time antidote to public and competitors as well who are making profits at the cost of customers. The bank is trying to attract customers and expand business in UK by taking retail as well as commercial banking to their basics. To overcome operational challenges in UK due to heavy competition, Metro Bank is offering ‘personalized service based on the provision of transparent, fairly priced products’( ). Though the interest and mortgage rates are high compared to the competitors, the timely response, quick opening of new account, advanced internet banking facilities, minimising the necessity of the customer to visit the bank is making the Metro Bank to stand apart from other in serving the customer at the door step. The reason for less fees, is that the metro bank operate at a significantly lower IT cost base. This facility is enabling the bank to achieve minimum efficiency necessary for a bank to operate in UK.
In addition to that the regulation in UK has been framed in the course of time to create a common financial market and harmonized regulatory schemes for the banks operating and based in European countries and part of European Union. As a result, the convergence process of European banking has been completed after 1992 and this resulted in integration of segmented banking markets. This integration and the regulation that enabled has made it difficult for new entrants to enter into the UK banking sector as the needs of capital, liquidity and profitability are set high. However, the metro bank with reasonable capital and liquidity, has entered UK market in 2010 and concentrated on retail banking along with securities and derivatives. According to Montanaro E, Scala C & Tonveronachi M (2001, 109) the weakness in the regulation or deregulation of banking industry in UK is that it resulted in oligopoly as the business has been concentrated in existing banks and the European ones, and it is difficult for a bank operating in a country other than European Union to enter UK. This is because, the regulation has removed legal and administrative barriers but did not remove the economic barriers for the banks out of EU to operate in a country like UK and this made the entry of Metro Bank a hard way. The financial services authority has scrutinized the availability of capital, liquidity risk and credit risk of Metro Bank and the capacity to absorb the unforeseen losses in the present situation of high interest rates and plummeting shares. Due to the profitability of the bank and availability of enough liquidity to absorb any unforeseen losses and to manage the financial needs of UK branches until they turn breakeven, FSA granted permission to Metro Bank PLC to start business in UK (Montanaro E, Scala C & Tonveronachi M: 2001, 109).13
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).14 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). 15
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 R; 2001, 1). Shaw R (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 R: 2001, 1-3).16 Even in the above-mentioned situation, Metro Bank has seen conduciveness in the current environment of UK for new entrants. According to Robinson B & Krommenacker T (2011, 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 B & Krommenacker T (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 B & Krommenacker T (2011, 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 B & Krommenacker T: 2001, 1-6).17
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 invesing in IT and streamlining the employment’ (Fernandez E, Montes J.M, Vasquez C.J; 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 E, Montes J.M, Vasquez C.J; 2001, 47). In addition to that the bank applied information technology ‘for aggressive price competition and to introduce product and process innovations’ (Fernandez E, Montes J.M, Vasquez C.J; 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 E, Montes J.M, Vasquez C.J: 2001, 46-48).18
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).19 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).20
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 H; 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 H; 2010)21 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.
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).22
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).23 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, (Ackerman J; 1998) Metro Bank is able to mobilise the cash reserves necessary for starting a bank in United Kingdom.
Basel rules and Metro Bank
The stringent regulations to establish a new bank are due to Basel II rules framed in the backdrop of financial crisis in 2007 and are followed in UK. According to Cecchetti S.G, Domanski D & Peter G.V (2011) Basel committee on banking supervision observed that the large global banks are operating with ‘slim capital cushions (Cecchetti S.G et al., 2011), which are not sufficient to absorb losses in the times of crises faced by economies. That means more soundness is necessary for banks and regulations are framed that compel banks to hold 4.5 percent of capital for absorbing the losses and 2.5 percent of the capital for tier I risks. As a whole the banks should hold 7.5 percent of their capital with central banks of various countries in which they operate to meet the regulatory requirements (Cecchetti S.G, Domanski D & Peter G.V: 2011).24 In United Kingdom also the same requirements are necessary for establishing a new bank. Hence, Metro Bank has to show enough capital that can act as cushion to absorb losses in adverse conditions of economy if happens. The capital adequacy should be attained without selling the assets of the company. In this regard, the Metro Bank has attained the capacity to ‘contain the build up of the systemic risk’ (Cecchetti S.G, Domanski D & Peter G.V: 2011).
In this regard it is important to mention the Metro Bank’s attempts to comply with tighter rules by selling ‘primary paired with equal number of secondary shares proportionally from controlling stockholders’ has resulted in P5billion ($115.075 million = 73.0230 million GBP) capital raising. Chairman and Vice Chairman of Metro Bank UK has together raised a total of 120 million GBP and sought the licence from FSA (Southon: 2011). This has resulted in enhancement of capital adequacy ratio of Metro Bank as per the rules and regulations of Basel III. This resulted in decrease of risk due to risk assets as capital adequacy ratio reached 10.4 percent of risk assets. Basel III requirement is ten percent and though Metro Bank reached 10.4, it aims to reach 15 percent and the meeting of above capital requirements and presence of enough liquidity granted FSA permission for Metro Bank to start its operations in United Kingdom in 2010 (Dumlao D: 2010). Metro Bank’s efforts to increase capital to enter UK might have been prompted by the fact that the ‘changing structure of global financial markets not only has created more opportunities for profits but also has introduced a higher level of risk in financial transactions that may impact systemic stability’ (Alexander K, Dhumale R & Eatwell J; 2008, 14).25
Metro bank has eyed on the opportunities for profits created by the changing times and wants to neutralize the risk of financial transactions by higher rates and fee related services. Though it offers free services like giving notes for coins and free dog food for the customers visiting its stores (branches) it charges fees for different services. However, the bank’s policy is to be transparent while levying charges or fees and offering excellent service that is available nowhere. According to article published on techach.com by Anonymous (2011), after suffering from their high street banks, customers are seeking a bank oriented towards them. However, Metro bank is attracting even customers going abroad as it is offering the free usage of ATMs abroad. This facility is being offered by very few banks till now and Metro is one of them, which makes it competitive with high street banks. 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 (Anonymous: 2011).26
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. Still people are ready to bank with Metro Bank. In this regard Bank’s chairman Anthony answered that the ‘value’s much more than just price’. However, he narrates about the products that the bank offers at less or no rates when compared with its competitors. Anthony mentions about the bank’s credit card that offers zero percent for 12 months and the reasonable rates they charge on foreign currency exchanges.
Regarding the products that charge prices or rates more than their competitors, Anthony explains that value is more than price and their good service offered creates value that cannot be matched with extra price they levy on the customers. In addition to that the chairman of the banks says that their business account customers are ready to pay the extra charges when compared to other banks as they value good service. In addition to that he defends higher rates on loans to smaller business operators, who are not able to get loans from competitor banks of Metro, as they do not lend to them due to inability to deleverage the balance sheets. Consequently they have to reduce the number of loans due to lack of capital and Metro Bank enters that vacuum created by decreasing of loans by its competitors and offers loans to small business operators comparatively higher rate than other banks. This strategy of getting enough customers for the bank is due to the inability of other banks to give loan to small business operators (David Kuo: 2011).27
Products and Accounts of Metro Bank
In addition to the fees and charges levied on the products, Metro bank is linking one product to other so that the customer needs to take both. For example the bank has offered an international credit card with no extra charges on the amount spent abroad, but it comes with a rider that the customer should have a current account with Metro Bank to get that credit card. That means Metro Bank is getting customer for its two products at one shot. Though it offers interest free cash withdrawals on credit card for 12 months, it comes with a rider that if the customers want to use the balance transfer offer it charges three percent transfer fee and the customer can only ‘equate 75 percent of the total credit limit’ (Evans T: 2011).28
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).29
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).30
Ways and means of Metro Bank operations
According to Vermon Hill as said to Simon B (2011), 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 S: 2011).31 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 by Southon (2011) in Financial Times 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. Moreover, Metro Bank has the IT systems built with latest technology which is capable to offer cost-effective solutions regarding banking services. This is because, the staff is able to ‘see all of their clients’ mortgage, insurance and bank account activity on one screen, not spread over different and incompatible platforms as often happens in traditional banks’ (Southon; 2011). This information enables the staff to process the service request of the customer as soon as possible. Though the Metro Bank’s interest rate charges are not low when compared to its competitors, the service innovation it is offering is attracting small business operators who don’t get a loan from bigger banks to use the service of Metro Bank. That means Metro Bank is banking on shortcomings of its competitors in UK and wants to be successful in retail banking sector and wants its branches to be operated as retail stores and calls them by that name (Southon: 2011).32
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 A; 2011). In the one year period in UK, Metro Bank managed well in ‘planned expansion of mortgage and commercial markets. However, CEO Donaldson believes that that stringent regulation after the crash of Lehman brothers, which resulted in focus on liquidity of banks, did not lessen the risk for the banks. 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 A: 2011).33
Even in the face of several customer friendly services, there is enough completion in UK for Metro Bank as the country has bigger banks like HSBC and Barclays with tier 1 capital more than that of Metro Bank. In addition to that several building societies have been converted into banks and even some bigger supermarkets like Sainsbury, Tesco and Safeway have ‘basic depost and loan facilities’ (Heffernan S; 2011, 224). Due to these conditions of severe competition in offering services Metro bank has revolutionized the way the bank works and is calling its branches stores of retail banking. However, credit risk exists due to the aggressive marketing activities of Metro Bank by funding small business operators. In this regard Heffernan S (2005, 155-156) explains the problem faced by banks while assessing the individuals or a small firm. It would be easier for banks to assess the risk of a corporate firm. Hence, banks normally try to lend to corporate and ignore small business operators or individuals(Heffernan S: 2011, 156-224).34 However, Metro Bank is trying to assess the small business operators regarding their risk by monitoring them continuously. In addition to that Metro Bank is attempting to attract customers with its all red stores with glass less desks to deal with customers. After one year of its entry into UK banking, one of its competitors is trying to attract customers in the way of Metro Bank. People in all blue t-shirts near Barclay’s branch, which is just 100 yards away from Metro Bank store in Southampton are trying to attract customers to their branch.
That means, the 321 years old bank of Britain, is feeling the heat of competition from the new Entrant Metro bank, which is trying to offer traditional services with swiftness of modern technology. The slogan of its Chairman Anthony Thomson about driving footfall to their stores is changing the way their rivals operate. However, Metro Bank’s competitors are relying on the fact that the new entrant is still small as far as the number of its branches (stores) are considered. With less number of branches, it cannot challenge the business of the bigger players and their confidence was they too can change in the mean time, Metro increases its branches to 200 in London by 2020. Perusing these views, one can understand that though Metro is having enough capital, liquidity to enter UK’s banking market, its inability to open more number of branches in a less period of time is restricting its success in UK. Though the bank is successful wherever it started its store, their limited number is challenging its competitors only in few areas of their existence (Kivlehan N.P: 2011, 10-11).35 Even though it has opened its stores in only few areas when compared to its competitors who are high street banks, Metro Bank sees ‘overwhelming demand for services’ (Murray R; 2011) from the customers. To meet the challenge of more branches for its competitors, ‘Metro Bank has announced the kick off of its 2011 store opening programme with a party at its new store opening on Tottenham Court Road on 18th March’ (Murray R: 2011). The new Tottenham store opened in March is good place for personal banking and business customers according to Bank’s CEO Donaldson C. 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 R: 2011).36
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 C 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 UK (Baumann C, Burton S & Elliott G: 2011).37
Consequently every success of Metro Bank can be attributed to the internal model and structure as well as the retail banking it follows with the idea of its co-chairman Vermon Hill. Hill V ponts out that their retail banking model is a service based one in contrast to the model observed by their competitors and that according to Wharton (2011), has turned customers into fans of the Metro Bank established in UK with Hill V as co-chairman and Anthony Thomson as Chairman (Wharton: 2011).38 This resulted in a competition in UK banking market that has been ‘dominated by just five banks’ (Temenos: 2011). However, Metro Bank’s is a risky decision as it entered the UK market with ambitious growth targets and by implementing ‘old-fashioned business models based on the provision of simple products but differentiated by superior customer service’ (Temenos: 2011). However, its co-chairman Vermon Hill has applied the same type of banking model in Commerce bank of US and decided to implement it in a period of anti bank spirit characterized by the age of lessening the credit to average and moderate risk customers by the high street banks in UK. 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: 2011).39
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.
- 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.
- As the present size of the Metro Bank is smaller when compared to its competitors in the terms of the number of branches (stores), it is necessary to increase them in the near future to expand horizontally and to grow vertically in UK’s banking sector.
- The competitors of Metro Bank are financially strong enough to compete with it in terms of retail banking and this aspect should drive the management of Metro Bank to consolidate its business and customers before its competitors react and implement the same model of retail banking.
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