Co-op drops Lloyds deal: end of ethical banking revolution?

News that the Co-operative Bank can no longer commit to buying 632 branches from the part-nationalised Lloyds banking group will be a blow to the banks’ customers.

But it has also been hailed as bad news for British banking customers all round, signalling less competition in the sector and paving the way for continued dominance of the so-called “big four”.

It comes amid rumours that the Co-op – the Britain’s largest bank with a comprehensive ethical plan – is considering leaving the banking sector altogether. (Rumours that the Co-op group has denied to Channel 4 News).

“That would be a huge blow to the Treasury and Bank of England, which had hoped that the Co-op would become a powerful competitor to the big banks,” writes the source of the rumours, the BBC’s Robert Peston.

The deal with the part-nationalised Lloyds bank would have seen the Co-op grow to 974 branches – around three times its current number of branches. At the time, the Co-op had claimed the deal would be the “biggest shake-up in high street banking in a generation”, increasing its customers to 11 million and around 7 per cent of the current account market share.

Chancellor George Osborne had encouraged the sale, saying it was a “step towards creating a new banking system for Britain”, and the government had apparently been working behind the scenes to try and help it along.

Read more: Economy blamed for £750m Lloyds deal breakdown

‘Shake-up’ on hold?

Does the deal collapse disprove the much heralded revolution in the ethical banking sector? The last few years have seen an increase in banking consumers voting with their feet. The week following the Libor-fixing scandal and Bob Diamond’s initial refusal to resign last July, saw a 25 per cent increase in online applications to the Co-op alone. The bank reported an 8 per cent increase in applications for current accounts last year.

Smaller mutuals and banks with an ethical agenda also continue to grow. The Charity Bank, for example, told Channel 4 News that its deposits had grown from £66m to over £86m since January last year.

But the scale is still tiny compared to the main retail banks. Lloyds TSB Banking Group, RBS Group, Barclays, HSBC and Santander still have almost 90 per cent of the retail banking sector.

And the latest research published today into customers’ banking habits once again shows that we are loath to switch. Santander found that the average length of time to stay with a bank is 16 years.

Read more: Five banks blazing the ethical trail

Slow but steady

Nonetheless, the collapse of the deal is good news for the sector, says Rob Harrison of Ethical Consumer. He told Channel 4 News he was “relieved” because of the high risk involved, adding that the benefits would have been greater for the Treasury than the Co-op.

“The Co-op Bank’s losses in the last financial year (£662m) were horrible,” he said. “Growing the ethical banking market by acquisition in this way was probably a risk too far for this invaluable ethical leader.”

He also echoes concerns voiced when the deal was announced last July that the Co-op’s expansion could compromise its ethics.

The Co-op’s Peter Marks said the group was still committed to developing the bank in the long-term, signalling a more organic, risk-averse growth strategy rather than the overnight transformation that could have been. The bank cited the UK’s poor economic growth outlook and new banking regulations for the decision to pull out of the deal.

Switching made easier

But the real test of the Co-op’s success – and the measure of public sentiment – will be seen after this September, when the government’s proposals to make it easier and faster for consumers to switch come into play, with the formation of the payments council. An OFT review suggests that this could encourage up to seven million people to switch banks by the end of the year and the ethical sector will be keeping their eyes peeled to see just where those consumers go.

However if the government is serious about creating diversity and breaking up the hold of the big four, it needs to do more, said Laura Willoughby, chief executive of banking reform campaign group Move Your Money.

“It’s time for the government to take the bull by the horns and ensure that the sale of Lloyds and RBS branches is used to create a real challenger bank,” she told Channel 4 News. “One that puts customers first, lends to local economies and injects meaningful competition and accountability into the sector.”