On the 1st January 2012, the sale of Northern Rock to Virgin Money was completed, signalling the arrival of a new bank brand on the UK high street. Virgin Money, as part of the wider ecosystem of Virgin companies, could really shake up the UK's banking sector and, possibly, provide a serious challenge to the big players who currently dominate the country's retail banking.
Jayne-Anne Gadhia, Chief Executive Officer at Virgin Money, comments on the deal to take over Northern Rock:"It is the outstanding fit between the two businesses that will allow us to create a strong, stable, growing and profitable business for the future. We are aiming to build a true banking alternative for the UK consumer, one centred around our ambition to make everyone better off."
Virgin founder Sir Richard Branson says: "Our entrance into the world of banking reminds me of the excitement of the early days of Virgin Atlantic more than 27 years ago. It's another massive milestone in the history of the Virgin Group and one where we can make a real difference to the market…
So what is the background to Virgin Money's entrance into high street banking? Is the deal to take over Northern Rock a good result for the public who bailed out the bank? And how can Virgin Money shake up the UK's banking sector?
Sir Richard Branson founded Virgin Money, originally entitled Virgin Direct, in 1995, establishing it as a UK-based bank and financial services company under the wider umbrella of the Virgin Group. The bank became a pioneer of index tracking, offering a value Personal Equity Plan on to the UK market, and went on to expand its international operations at the start of the 21st Century. Virgin Money purchased the Church House Trust in 2010, and subsequently received a UK banking licence. In November 2011, Virgin Money announced that it would purchase Northern Rock; the deal was completed on 1st January 2012.
In 2008, the Labour government bailed out the failing Northern Rock to the tune of £1.4 billion. At the time Virgin Money was one of the principle bidders to take over the bank, but the Labour government decided nationalisation was the best option, and in effect British taxpayers became the owners of Northern Rock.
Four years on, Virgin Money has successfully acquired Northern Rock's retail section. According to the Guardian's City editor Jill Tenor, "the full purchase price could reach £1bn if certain criteria are met and Virgin is able to fund part of the deal by realising excess capital accumulated by Northern Rock, which has been split in two to facilitate the sale. The taxpayer continues to own Northern Rock Asset Management (NRAM), which contains mortgages and loans from the government that were used to keep it afloat four years ago." Regarding NRAM, Tenor also says that, "the bad bit of the Rock still exists and has been merged with the nationalised mortgage book of Bradford and Bingley to create something called UK Asset Resolution (Ukar). Essentially it is in run off so the loans and guarantees from taxpayers get slowly paid off as people pay off their mortgages."
So is this a good deal for the taxpayer? The current Conservative chancellor George Osborne believes it is, stating "the sale of Northern Rock to Virgin Money is an important first step in getting the British taxpayer out of the business of owning banks. It represents value for money; will increase choice on the high street for customers and safeguards jobs in the North East."
Robert Peston, the BBC's business editor, speculates on Twitter that "the sale of Northern Rock is sensible if you believe a) it will be managed better in private sector; b) it will stimulate competition."
Virgin is buying Northern Rock for an initial £747m, plus a possible £250m later, meaning the taxpayer stands to lose £400m and £653m on the original £1.4bn bailout. Nevertheless, London Evening Standard columnist Nick Goodway asserts that this is the best outcome for the public:
Chief executive Jayne-Anne Gadhia says the great thing about the business combination of Virgin Money and Northern Rock "is that the two businesses lock together very well. Virgin Money has credit cards, insurances and investments, and Northern Rock has mortgages, savings and current accounts."
The merger means that Virgin Money now provides the full range of banking services - current accounts, savings, loans, credit cards, mortgages, pensions, insurance and investments – whilst bringing a new attitude to high street banking. Branson explains the company's approach: "Banking in the UK needs some fresh ideas and an injection of new competition. Virgin has a history of entering new sectors to improve service and provide value for customers. We plan to do the same in banking."
Virgin Money will soon be operating out of Northern Rock's 75 UK bank branches, which are to be rebranded as Virgin Money Stores, each designed as a "bright, relaxed, comfortable environment to come and sort out money matters, quickly and easily." In addition to the Stores, plans include the creation of Virgin Money Lounges in five cities - Edinburgh, Newcastle, Norwich, Manchester and London. These Lounges are open to customers and their guests to drop-in to speak to advisers, use the internet, read the papers, or to simply relax and enjoy complimentary refreshments. Branson has also suggested that he would like to open bank branches in the UK railway stations that Virgin Trains operates.
For many years the 'big four' banks - Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland – have dominated UK retail banking, a situation that has remained largely unchanged since HSBC's takeover of Midland Bank in 1992. The recent financial crisis has shaken the public's trust in banks – practices and institutions that once seemed set in stone now look far more vulnerable to change, and consumers are increasingly willing to move their money and custom to new banks. The introduction of a new bank with Virgin's attitude and innovative approach to business has the potential to shake things up, and it will be interesting to see how other banks react to this new competitor.
Compared to other countries such as Australia and the US, rewards programs aren't so popular in the UK, but Virgin Money could change that.
Virgin Money customers enjoy discounts on a range of Virgin products and service, and the company has used its retail muscle to negotiate a variety of attractive offers from other partners. Discounts of up to 50% are available including holidays and travel with Virgin Holidays, Virgin Trains and Holiday Autos; home, family and health products such as Virgin Active, Virgin Wines, Virgin Life Insurance and Virgin Pet Insurance; and entertainment with Virgin Books, Virgin Balloons and Virgin Experience Days.
Customers who use Virgin credit cards can join an exclusive discount scheme, earning points on spending and redeeming them for savings on a huge selection products and services from Virgin and its partners. Virgin Atlantic credit cards provide access to Virgin's Flying Club, allowing customers to earn and redeem points for flights, hotels, rentals, other travel services, shopping rewards and much more.
The Virgin brand encompasses such a variety of products and services that new customers could easily be tempted to switch their loyalty to Virgin Money and enjoy all the discounts and benefits the company offers. If this does have a significant impact on where people choose to do their banking, the other main UK financial providers could try to get in on the action, effectively triggering a 'rewards war'.