Why the Co-op could fall while RBS struts on

Over the past five years the Co-operative Bank grew too fast, merging with the Britannia Building Society and then launching an ill-fated attempt to take over more than 600 branches from the Lloyds Banking Group. The subsequent financial fallout has led the Co-op down numerous murky paths.

The bank has been approached by the City regulator, the Financial Conduct Authority, regarding claims that were made in 2012 about the Co-op’s financial strength and investigations are underway. Meanwhile, the bank will be forced to close about 60 of its 324 branches and lay off a significant number of its loyal employees – all because of senior management ineptitude. The bank is also dependent on a £1.5bn rescue package. Much of that investment will come from a group of hedge funds, many of which are based in the US.

As you might recall, RBS got into trouble during the global financial crisis and was only able to stay afloat thanks to the British Government, which stepped in and bought 82 per cent of the bank using taxpayer money.

In the five years since the deal was done RBS has produced five consecutive years of losses totalling a whopping £36bn. Despite losing barrels of public money, the bank’s senior management team have continued to pay their executives enormous bonuses. In February, for example, RBS lost just over £5bn but still paid more than £600m in bonuses for a job well done.

RBS was fined £28m for anti-competitive activity in 2011 and a recent report by the former deputy governor of the Bank of England Sir Andrew Large on the bank’s small business lending has shown RBS to be “incompetent and inadequate in every way”, according to the Financial Times. Despite already holding £54bn in toxic assets, the bank has elected to create a new ‘bad bank unit’ to contain an almost equally poisonous set of loans that are meant to be worth £35bn. Last week, it was announced that US lender Fannie Mae will sue RBS over its part in an alleged conspiracy to fix global borrowing rates. And this week we learned that the UK’s Financial Conduct Authority is also probing RBS and its foreign exchange activity.

Let us pause at this point and appreciate just how rotten, rotten, rotten the banking sector has become. We speak in marketing about brands being a badge of quality and of engendering trust, but surely in the history of capitalism there has never been such a disgusting and diseased category. The marketing textbooks would teach us that within such an odious comparison set new brands should emerge and differentiate themselves from the rest. Somehow all hope of that has been extinguished from the British banking category. They all look as bad as each other.

As to the question of which of these brands is in the bigger trouble, the answer is simple – it’s the Co-op. The misdeeds of RBS easily outpace those of the Co-op but this was never an objective case of crime and punishment. In capitalism, you are punished subjectively by your consumers. So while both banks have approximately five million customers each, there is one crucial difference between the two groups – Co-op’s customers expected better.

Review the RBS and its current positioning of “building long lasting relationships” and “earning your trust” and “delivering on promises” and it’s clear this is just branding by the numbers. We can assume that the vast majority of RBS customers are with the bank not because of the brand but because of initial ignorance and then latent inertia. Short of misplacing their money, most RBS customers will shrug and sail on.

But the Co-op Bank is different. It has attracted a segment that is genuinely committed to fair play and that believes banking can be different. The bank has attracted this segment with a long-standing campaign to demonstrate its ethical stance on all things and its distinction from other banks.

For these reasons, the Co-op Bank will suffer, and possibly disappear. Not because it was any worse than the rest of them but because the customers it attracted were the only people left in Britain who thought banking could be better.