Multiple scandals, from forex rigging to PPI, have left the banking sector with a wide credibility gap. And the Co-op Bank’s is wider than most. After a calamitous few years, its standing is at such a low that the UK’s Financial Conduct Authority recently decided against fining it – despite finding it guilty of misleading investors and pursuing growth at the expense of financial stability – for fear of making the bank’s situation worse.
When even the regulator sees fit to take pity on you, you know the situation is dire. And this was quickly followed by an earnings report of more than £200m of losses for the first half of the year and a prediction that it will not return to profit until 2017. But better days are ahead for the troubled bank.
Now under new ownership – the Co-op Group holds just 20% of shares – the bank, like the wider sector, faces an uphill struggle to win back credibility with the regulator, with investors, and, crucially, with customers. Ironically, this will come with a move away from its former focus on ethical banking.
The Co-op Bank brand is damaged and the new owners are unlikely to have much nostalgic attachment to the name or its ethical positioning. For the past 20 years, the Co-op Bank has been at pains to build a reputation for “ethical banking”, swearing off controversial areas like arms and tobacco. But how much of a draw this has been for consumers is questionable.
Now the institution is largely out from under the umbrella of the Co-op Group, the hedge funds which make up the majority shareholding will be looking to reposition the business on a commercial footing. Indeed, their apparent long-term commitment to the bank suggests they believe the potential for future success is strong.
A good model to follow could be that of the Co-operative Permanent Building Society, a now little-known institution which in 1970 emerged from a period of relative stagnation to become Nationwide. As that example shows, with strong leadership and decisive action it is possible to breathe new life into an ailing institution.
Throughout the early part of this decade, there was a clear leadership deficit at Co-op Bank, and the Co-op Group more widely, which prevented the bank from responding decisively to the difficulties it found itself in. But in Niall Booker, the Co-op Bank now has a leader with a wealth of experience across a long career and a history of success in good times and bad, having managed HSBC out of the sub-prime mortgage crisis in the US.
Rediscovering its customer focus
So, the Co-op Bank has stable ownership and strong leadership; it now needs a new proposition to take to consumers.
The Co-op’s recent travails are well documented, with mismanagement and scandal all but destroying its ethical credentials. In reality, this positioning has largely been window dressing anyway. The Co-op Bank may not have had weapons manufacturers or tobacco firms as customers, but that had more to do with the institution’s relative minnow status as a clearing bank than its inclination to turn away certain types of business.
The ethical message might have resonated with the public in the past, but any attempt to resurrect it will only draw attention to previous failings. As guilty as the rest when it comes to PPI, the Co-op Bank’s £1.5 billion capital shortfall when attempting a takeover of Lloyds’ branches, which led to the FCA’s recent investigation, will have done little to regain the public’s trust.
Being the “ethical bank” carries less weight now than when the Co-op Bank adopted its ethical policy in the early 1990s. The rise of corporate social responsibility and targets aimed at sustainable practices has made the endorsement of ethical policy the norm.
Consumers are now making savvier commercial decisions when choosing who to bank with. They are focused on banking with a financially viable institution and getting the best deal they can. A reputation for behaving ethically might be a useful add-on, but if the rest of the offer doesn’t stack up – if the bank isn’t quick and easy to use, trustworthy, and offering good rates and returns – it won’t get far.
The Co-op Bank has historically done a good job of this. Its Smile brand, for example, was a pioneer of full service online banking. If the bank is to revive its fortunes, it must rediscover a customer focus. In a world recovering from a financial crisis and mis-selling scandals, treatment of consumers has a more significant resonance.
That is the direction the Co-op Bank should take its ethical banking – showing that if you adopt a common sense approach and build trust with consumers, giving them the best deals and the best customer service, you can start to close the credibility gap. And should the Co-op Bank succeed, it could be a model for the whole of the UK banking sector.