One month on from Project Verde, what have we learnt?

Back at the end of last month, I wrote a piece for the Guardian about the collapse of the Project Verde deal, and what that debacle said about the state of the UK’s retail banking industry. Now, a few weeks further on, the plot has thickened for both the Co-op and Lloyds, and I thought it might be worth revisiting the situation, and to see if unfolding events have anything further to tell us about the state of the industry in the UK.

My conclusion when the Lloyds sale collapsed was that it was a black day, not just for retail financial services, but for British consumers and small businesses as well. My opinion in this regard hasn’t changed, but it seems that the collapse of the deal was far from disadvantageous to Lloyds which, while it now risks censure from Europe, last week saw its share-price pass the break-even point whereby the government can recoup the price it paid for its stake back in 2008.

For Co-op, however, things appear a great deal less rosy – the chief executive stepped down early in the wake of the Project Verde collapse. Also,it emerged last week that its capital reserve is considerably less than could be required to cover the risk of potentially toxic loans acquired during the last commercial property boom.

It’s still my opinion that, for the sake of British consumers and small businesses, more innovation and competition is sorely needed in UK retail banking. However, I believe it would be foolish to conclude that the drastically differing fortunes of Lloyds and the Co-op over the last couple of weeks actually demonstrates that need. That would be to ignore the influence of the state-backed bail-out over the stability of the former. Nor should we, as some commentators have claimed, draw conclusions about ‘shopkeeper running banks’, and infer that the Co-op’s management is not fit for purpose, or should withdraw from banking altogether. In fact, I have written elsewhere of the many things that retail banks could learn from the retail industry itself – there are many respects in which we could do with more shopkeepers running banks, not less.  After all, in some surveys, nearly five times as many consumers express dissatisfaction with their bank than with retailers.

The retail industry makes healthy profits and is characterised by fierce competition, and consequent rapid innovation.  Conversely, it is not dominated by a murky ‘shadow’ industry and it poses no systemic risk to the wider economy. Most importantly, it serves the needs of its customers admirably. The Funding for Lending Scheme in particular is only the most vivid demonstration that the UK retail banking industry is not fulfilling the needs of its target market, and that is evidence enough that something must change – when government must step in to encourage banks to carry out their fundamental business (i.e. making loans), it is clear that the system is not working as it should.

While Project Verde may be gone, it will not be forgotten, and it will not be the only challenge to the industry’s status quo. Indeed, we must hope that it is not: while it would be a mistake to underestimate the benefits that big banks can have for an economy, we should not ignore the benefits that increased competition could have for the industry, and for the wider economy.