Can the new Virgin Money become the Aldi of retail banking?

So it’s farewell to the Clydesdale and Yorkshire banks. With their owner CYBG having completed its merger with Sir Richard Branson’s financial services outfit, all its constituent parts will in future trade under the Virgin name.

You’ll still be able to use Clydesdale notes north of the border, but that’s about it.

Don’t be sad, though. The enlarged Virgin is going to “disrupt the status quo”. So said CEO David Duffy as he embarked on a capital markets day to show off his plans to the City.

Consumer banking is an industry that sure could use some disrupting.

It’s a business dominated by four giants: Barclays, HSBC, RBS and Lloyds, the latter two of which nearly broke the country during the financial crisis.

At the end of it, the then Labour government made a big fuss about creating a bunch of feisty new competitors to challenge the status quo and shake up the market. Trouble is their impact has been strictly limited to date.

I pay close attention to the net interest margins (NIMs) reported by Lloyds, which is Britain’s biggest retail bank. The NIM is the gap between what the bank charges borrowers and pays to depositers, and it has been steadily rising over the past few years, despite the current low interest rate environment which is supposed to put the squeeze on banks’ margins.

At its 2018 results in February, Lloyds said it came in at 2.93 per cent against 2.86 per cent in 2017. The bank also reported a 3 per cent rise in income but a 6 per cent boost to operating profits.

In a truly competitive market, with feisty new and impactful entrants, those numbers should really be going the other way.

The grocery market provides a good example of what happens to margin when a genuine disruptor arrives. It also has a big four: Tesco, Sainsbury’s, Asda and Morrison’s. But their profit margins are running at less than half what they were before Aldi and Lidl reached critical mass. They’ve had no choice but to respond, cutting their prices and their profit margins in an attempt to keep hold of their customers.

Aldi and Lidl have successfully shaken up the existing players through doing something very different, with their offer of a limited range of ultra low priced produce sold in stores that are smaller than traditional supermarkets but bigger than convenience outlets.

If you were hoping for something similarly revolutionary from Virgin after its CEO’s talk about being disruptive, however, get set for a disappointment.

“Our strategic and financial plan will see the completion of the full integration of Virgin Money while building a simple, highly efficient, digitally enabled business, with a significantly improved customer experience,” the bank declared.

I apologise if that made you yawn, but it serves to illustrate the point. It’s not the way a disruptor speaks. It’s just more corporate guff.

That’s not to say the shiny new Virgin bank doesn’t have a good shot at growing quickly and doing some good business for itself.

Investec analyst Ian Gordon points out that the combination has a broader product range than the two constituent parts did so there’s the potential to cross sell to each set of customers. He also sees potential in the opportunity it has to push into areas beyond its geographic heartlands.

On the consumer side, offering half decent customer service would be positively revolutionary in banking (although as a less than happy CYGB customer of many years standing I’m reserving judgement).

Virgin surprising on the upside would ultimately be a thoroughly welcome development, especially in this market. But the disruptive Aldi of banking it ain’t.