Investing in any startup challenger bank will always be a high-risk proposition.
As Chief Finance Officer for the London Borough of Brent, I was introduced to Greater London Mutual (GLM) via the RSA, and initially met the proposition with considerable skepticism. However, upon closer evaluation of the model, I have since come to view it as a potentially valuable means of tackling financial exclusion, supporting Brent’s most disadvantaged communities.
Brent’s social and economic landscape
Brent has a population of around 350,000 and is one of the most diverse boroughs in London and the UK. A relatively high proportion of the population is newly arrived in the UK and there is considerable income inequality, with very deprived communities alongside substantial affluence.
Estimates vary, but we know that a significant proportion of our residents cannot access mainstream bank accounts. This can be for a variety of reasons but is often because they lack some of the documents that most banks require, which can be particularly prevalent in more recently arrived communities. Research shows that residents without a mainstream bank account pay a ‘poverty premium’ of £500 on average, simply because they cannot access the best deals for ordinary services like utilities, as they are unable to pay by direct debit. In more extreme cases residents may also be forced to rely on expensive payday loans, or worse, due to lack of access to affordable credit.
Greater London Mutual – a different kind of bank
The Chair of Greater London Mutual (GLM), Kathryn Kerle, outlines in her recent article for the RSA that the new mutual aims to be a “radically different bank… that focuses on helping its local community flourish and aligns its interests with those of the individuals and businesses it serves”.
By providing current accounts to all applicants, regardless of their financial means, GLM will help to address the social problem of financial exclusion. They propose delivering their services through local bank branches, both manned and unmanned, as well as via mobile app and online banking. Their current account will offer facilities that may prove attractive to Brent’s residents, such as a ‘jam jar’ feature, which will facilitate budgeting, and safety deposit boxes. Such services may also prove attractive to Brent’s SME community, which is not always well served by mainstream banks. GLM’s proposal to have local bank managers who will really understand their customers, supported by innovative credit decisioning tools, could improve lending decisions and, in time, boost business growth.
There are good reasons to consider the proposal seriously. Equally, proper thought needs to be given to the due diligence process.
Investing in GLM
In total GLM are looking to raise around £20m. Local authorities are a natural fit, given the potential social benefits of such a bank, but they are also approaching social impact investors and high net worth individuals as well. Organisations such as housing associations and utility companies may also have a role to play.
Investment is requested in three tranches. The first and smallest amount would be to provide seed funding for the business model to be thoroughly researched and the regulatory business plan to be finalised. The second tranche would provide funding to complete the process of regulatory approval and the third and largest tranche would provide working capital and reserves so that the bank could operate.
Local authorities will likely need to make substantial financial investments for the proposal to get off the ground. The exact amounts will depend on the number of other investors, but it might be wise for councils to anticipate something like £3m to £5m. That's obviously a very substantial sum of public money to put at risk.
Considering the business case
Naturally, any council or investment body will need some proper due diligence of the business case, which will almost certainly require expert professional advice. I can't comment more on that part of the due diligence, as I don't have expertise in setting up a bank. However, local authorities will have considerable and very detailed knowledge of their local communities, and this will be invaluable in establishing how strong the market is for GLM’s proposal.
One issue GLM needs to address is that they are not offering conventional free banking; account holders will be charged a standard monthly fee. Whilst this may be cheaper than the hidden charges mainstream banks levy it could still be seen as a barrier, particularly for financially vulnerable residents. Utility companies and similar organisations that have an interest in seeing their bills settled promptly and without fail, could be incentivised to cover this monthly fee, thus enabling GLM to reduce or even waive fees for some financially vulnerable customers.
For councils thinking of taking this proposal further, and I think it has many potential benefits, I'd strongly suggest working with GLM or similar initiatives that are emerging in other regions based on the same model. A good starting point would be to get some market research done that is deeply rooted in your local communities. There will be many other aspects to the due diligence process, but without this market research to prove that there are enough customers likely to take up the offer you will struggle to justify investing further sums.
A potential double dividend
In summary, the GLM proposal has the potential to deliver real social benefits. Of course, it's risky compared with traditional local authority investments, but looked at one way all local authority budgets involve spending money to try and deliver social benefits. At least with this proposal, if it all works, the bank will become profitable over time and deliver a direct financial return as well as providing social benefits. I wouldn't propose investing purely to try and make that financial return, but if you view it as a socially beneficial proposal that may also make a financial return then the proposition can be seen in a different light.
Conrad Hall has been Chief Finance Officer for the London Borough of Brent since October 2013. He will take up a new post as Director of Resources at the London Borough of Newham on 24 June 2019.
The RSA is supporting GLM and the development of a network of regional community banks across the UK as part of the Transform programme. For more information please contact Mark Hall, Deputy Head of Engagement at Mark.Hall@rsa.org.uk.