The Treasury’s new solution for circumventing RBS’s failed attempts to offload its Williams & Glyn business has the potential to not only remove a major headache for RBS, but to inject much-needed competition into the UK’s SME banking market.
After the government bailed out RBS to the tune of £45.5bn at the height of the financial crisis in 2008, the bank was forced to divest itself of a portion of its business in order to comply with European Commission regulations on state aid. However, despite several years of planning, and potential interest from suitors such as Santander and Clydesdale and Yorkshire Bank, Williams & Glyn remains stubbornly within the RBS fold.
With the European Commission’s end-of-2017 deadline for a resolution approaching, the Treasury has proposed a series of measures in place of divestiture. These measures, to be funded by RBS to the tune of £750m, comprise the following four elements:
- An independently run fund that challenger banks can draw from in order to improve their business banking propositions.
- Payments to challenger banks to help them fund incentives to persuade SMEs to switch their business accounts from RBS.
- RBS to give business customers of challenger banks the ability to conduct cash and cheque transactions at its own branches.
- An independent fund tasked with investing in business banking-related fintech ventures.
RBS remains burdened by its pre-financial crisis legacy. As a result of fines, legal costs, and compensation claims it made a loss of £7bn in 2016, more than triple the amount it lost the previous year. The IT and administrative costs associated with divesting Williams & Glyn would further add to the financial pressures on RBS and delay its return to profitability.
At the same time, business banking in particular remains dominated by a handful of established banks. The Competition & Markets Authority’s 2016 Retail Banking Market Investigation found that the four largest SME banking providers hold more than 80% of the market, that differentiation between competing products is low, that charging structures are complex and difficult to compare, and that there is little genuine product innovation.
The Treasury’s proposed remedy to the RBS conundrum has the potential to kill both birds with one stone. Firstly, it is a far simpler and cheaper solution for RBS to implement, as it removes the need to undertake a highly complicated uncoupling of the 281 branches associated with Williams & Glyn. This should enable it to return to profit more quickly.
Secondly, SMEs will enjoy enhanced outcomes. The new measures address many of the business banking market’s shortcomings by making it easier for challenger banks to compete with the main providers and encouraging innovation.
The failed divestiture of Williams & Glyn has been a massive distraction for RBS. However, the “second best” solution will be far more effective at improving market outcomes and – assuming it is approved by the European Commission – means that a happy ending to this long-running saga is in sight.