Challengers rise to battle big four banks

Banking has been hogging the column inches over the past few months. While much of it has been bad news - banks manipulating a key interest rate or frozen bank accounts caused by IT problems - there has been some good news for consumers, in the shape of a flurry of new arrivals on the high street.

Almost all of the big four banking groups - Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland - have suffered a major PR disaster in the past few months.

First of all, the IT difficulties at RBS and subsidiary NatWest meant thousands of customers' accounts froze up. Then Barclays was fined a record £290 million from UK and US regulators for manipulating the London Interbank Offered Rate (Libor), a key benchmark that thousands of financial products set their interest rates against.

Most recently, HSBC could be fined up to $1 billion (£638 million) for allowing money from renegade states and drug cartels to be laundered through its subsidiary operations. And with bonuses at an all-time high - the Centre for Economics and Business Research says bonuses in the City were expected to reach £4.2 billion in 2011/12 - trust has crumbled in the largest banking groups.

As a result, many consumers have voted with their wallets and jumped ship to another provider. In the week that the Libor scandal hit Barclays, building societies and ethical banks mopped up market share, with mutual Nationwide reporting a rise of 85% in the number of customers opening and transferring their account online in the last week of June.

Metro Bank charms customers

And if a bank has behaved badly, consumers now have more alternatives to turn to than ever before. Metro Bank launched to much fanfare in 2010, promoting its focus on customer service. Unlike traditional banks, it is open seven days a week and until 8pm on weekdays, and uniquely, can print debit cards in the bank on the same day.

Since its inaugural opening on High Holborn in central London, it has spread across Greater London and across the South East, helped by a recent £125 million funding boost from its investors. Its one-year fixed-rate cash ISA, which pays 3.25%, is market leading.

However, its competitiveness has not been sacrificed for customer service. For example, Metro Bank's American founder and backer Vernon Hill is a huge fan of dogs, and a key part of the bank's offering is that branches welcome dogs, and give out free canine treats. Plus, if you open a current account with the bank, you can get a free dog from Battersea Dogs Home.

All very charming, but does it equal good banking? Metro Bank chief executive Craig Donaldson insists the bank is simply returning to old traditions, by focusing on the customer. "We strive to 'surprise and delight' our customers, and provide an unparalleled customer experience," he claims. "We have no wholesale funding, and of every £100 in customer deposits that comes in, £70 is lent back out. We're a modern bank with modern opening times, but we're a fundamentally safe banking model."

High-street retailer turned financial services provider LSE:MKS:Marks and Spencer launched its first branch of M&S Bank in July, alongside two new current account offerings. Both are paid-for accounts - one with travel insurance and one without - but they will only become fully serviceable in branch from October. The bank will follow the same opening hours as the store, and similarly to Metro Bank, will stay open late and on weekends.

Supermarkets are also extending their reach into financial services. Sainsbury's Bank, Tesco Bank, and Asda Money - recently rebranded with the launch of a cashback credit card - all offer insurance and credit services, but Sainsbury's and Tesco are also eyeing up current accounts. Tesco Bank recently launched a range of mortgages, and is already running two in-store pilot branches, which could be rolled out across the country.

"There's lots going on, and the UK banking sector is a competitive landscape," says George Zaborowski, senior financial services analyst at market researcher Mintel. "However, consumers haven't shown a lot of interest in these new banks, and generally we"ve found that they are unsure whether a new player can actually run a current account."

Foreign banks continue to land on UK high street

Meanwhile, foreign entrants such as Sweden's Handelsbanken, which now has 130 branches in Britain, has made a modest but impressive mark on financial services. UK deposits with the bank have increased by 58% year-on-year, and each branch is run like its own business, meaning the bank spends more time focusing on the long-term goals of the customer. State Bank of India also has a growing presence on the UK high street, with 10 branches in the UK, including five in London and five in the Midlands.

The onslaught of foreign banks is set to continue, according to Andreas Pratz, partner at management consultant AT Kearney, as overseas banks are using the UK - with its record low interest rates - as a cheap funding source, and using it to fund corporate loans in their domiciled country. ING Direct is one example of this, says Pratz.

Despite all the new entrants, according to the Independent Commission on Banking the big four banking groups still control 77% of current accounts and 85% of small- and medium-sized enterprise current accounts. The commission, led by economist Sir John Vickers, suggests that more must be done to make switching banks easier for consumers.

At the moment, the process can take up to 30 days and only 4% of people switched their current account provider last year, according to Mintel. Labour leader Ed Miliband has also called for greater competition in the banking sector, outlining plans to force the largest high-street banks to sell offup to 1,000 branches to increase competition between banks, and to lower charges for consumers.

This is starting to happen: in July, the Co-operative Group acquired 632 branches of Lloyds Banking Group for £250 million, taking Co-op's customer base to 11 million, and giving it a 7% share of UK current accounts. Essentially, consumers are becoming extremely tired with the big four, argues Kevin Mountford, banking expert at MoneySupermarket. "Consumers are now behaving very differently, and they want bespoke solutions to banking. The big four need to be challenged, both in terms of innovation and customer service," Mountford says.

One man's mission for change

Dave Fishwick of Burnley has taken on a thankless task: to open up a bank when morale in the sector is at an all-time low. Fed up with bankers' bonuses and the monopoly of the big four in the UK banking sector, the northern businessman has opened Burnley Savings and Loans in the Lancashire town, and is already lending £25,000 a week to customers out of his own pocket.

The 41-year-old is now trying to get the support of the City regulators to be able to call himself a bank and to be able to take deposits. At the moment, in the absence of a banking licence, Fishwick's bank can only take deposits and make loans using a peer-to-peer lending model, which pays savers 5% interest - far higher than the average no-notice savings account, which currently pays 1.61%, according to Moneyfacts.

Who should you give your money to?

If you can't trust one of the big four any longer, what alternatives do you have?

Building societies

Building societies tend to be owned by their members rather than shareholders and don't typically get funding from financial markets, which can make them a safer bet. Nationwide, Coventry Building Society and Norwich & Peterborough are among the few to offer current accounts, while the majority of the rest will offer a wide range of savings and mortgages.

Ethical banks

The Ecology Building Society and Dutch bank Triodos use savers' deposits to fund sustainable projects, while the Charity Bank finances charitable and community organisations. However, altruism comes at a cost and their rates on savings and loans are not as competitive.

Alternatives

Metro Bank and M&S Bank both cater for a very specific audience - Metro Bank offers seven days a week branch based convenience for those in the South East, while regular Marks & Spencer customers could be attracted to the paid-for current accounts, offering gift vouchers and loyalty points for store purchases.

Other alternatives include Handelsbanken, Virgin Money - which took over 75 Northern Rock branches at the end of 2011 - or Secure Trust Bank, part of Arbuthnot Banking Group.