‘The guy who brought you the Sex Pistols could sort out your pension, too.’

April 7, 2012

On a cold, clear January morning, Sir Richard Branson finds himself standing in the middle of a pedestrian-friendly street in Newcastle — a hardscrabble city in northeast England — becoming something he never thought he would be: a banker.

Bankers, after all, were the very embodiment of the Establishment at which Branson has spent his career thumbing his nose. Yet here he is in front of a bank decked out in the trademark red and white of his Virgin Group, and adorned with a banner proclaiming, “Our Quest to Make Banking Better Starts Here.”

This is Branson doing what he does best, playing the entrepreneur as celebrity icon, man as marketing ubermensch.

As curious bystanders and ogling fans gather, he smiles for the television crews, camera lights illuminating the 61-year-old’s preternaturally white teeth and uncannily yellow mane.

In September 2007, television reporters flocked to this bank branch to record a very different scene: a classic bank run that had customers lined up for blocks to withdraw their money.

The branch was then part of Northern Rock, the British bank whose reliance on short-term financing resulted in its becoming the first casualty of the global liquidity crunch.

After extending Northern Rock 27 billion pounds ($52.6 billion at 2007 exchange rates) in emergency loans, the government nationalized the bank in February 2008.

It later split the company in two. Northern Rock, a “good bank,” inherited the retail operations — 1 million customers, 10.3 billion pounds in mortgage loans and 19.4 billion pounds in deposits.

It was still unprofitable, however, losing 224 million pounds in 2010. Northern Rock Asset Management, the “bad bank,” was saddled with 50 billion pounds of its predecessor’s debt.

In November, the government sold the good bank to Virgin Money Holdings, Branson’s financial services company, for 747 million pounds in cash and 150 million pounds in convertible debt.

The price Branson paid was about 400 million pounds less than what the British government spent in January 2010 to bail out the bank — leading opposition politicians to complain that the deal shortchanged taxpayers.

It may be easier to break into Buckingham Palace than to become a major force in British retail banking.

For two decades, the industry has been dominated by the Big Five: Barclays, HSBC, Lloyds Banking, Royal Bank of Scotland and Santander, which was
Abbey National until Madrid-based
Banco Santander bought it in 2004.

They control nearly 80 percent of
personal checking accounts, 71 percent
of mortgage lending and about 60 percent of savings accounts, according to Britain’s Independent Commission on Banking.

Now, the question is whether Branson — whose net worth is at least $4 billion — can reorder British banking in the way his Virgin brand has disrupted industries including music, airlines and cellphones.

“We will be a very formidable player,” Branson said during an interview at the former Northern Rock headquarters in the Newcastle suburb of Gosforth.

Branson’s move into banking comes as the industry faces massive regulatory changes and consolidation in Britain and throughout Europe.

Banks are being forced to quarantine their retail operations from their riskier investment-banking units and proprietary trading desks.

“There is more structural change going on in the U.K. market than at any time in recent history,” says Ian Walsh, a partner in Boston Consulting Group’s financial institutions practice in London.

In his mission to revolutionize retail banking in Britain, Branson has teamed up with a veteran turnaround artist: U.S. private-equity investor Wilbur Ross, who is worth at least $2 billion.

Ross’s firm, WL Ross & Co., has invested almost 350 million pounds in Virgin Money for 45 percent of the company — a stake roughly equal to Virgin Group’s own share in the business.

With Virgin Money, Branson aims to bring change to an industry that has never been on the cutting edge.

Virgin Money itself is more refurbishment than new build. In late 1994, Rowan Gormley, a venture capitalist Branson hired to brainstorm business ideas, suggested Virgin get into financial services.

Everyone just laughed, Gormley says. Everyone except Branson. He loved the idea “that the guy who brought you the Sex Pistols could sort out your pension, too,” Branson wrote in his 1998 autobiography.

Ten weeks later, Branson created Virgin Direct, which sold low-cost index funds by mail and telephone. It later moved online and expanded into insurance and credit cards. In 2002, it changed its name to Virgin Money.

Catapulting Branson’s bank onto the center stage of British banking has been Jayne-Anne Gadhia’s goal since she became the company’s chief executive officer in March 2007. She turned her attention to a failing lender: Northern Rock.

She sensed opportunity, and in October 2007, advised by investment bank Greenhill & Co., Gadhia put together a consortium to bid for Northern Rock, which would instantly give Virgin the geographic footprint and product range to vie with Britain’s biggest retail banks. Among those Greenhill approached was Ross.

When the British government put Northern Rock back on the market last summer, Gadhia and Ross pounced. In the end, Ross contributed 250 million pounds to the purchase, giving him control of almost half of Virgin Money.

In January, Virgin unveiled its first savings account, offering 2.85 percent annual equivalent interest. It’s not the best available rate, according to financial comparison company Moneyfacts Group.

The twist, according to Virgin Money, is that there’s no twist: no minimum balance requirement and no withdrawal limits. The interest rate is also the same whether a customer banks online, by phone or through a branch.

That’s an example of what Gadhia likes to call EBO — short for everyone better off. It’s the bank’s internal motto. Whatever Virgin Money does should be good for customers and society — and make money.

Just off St. Andrew’s Square in Edinburgh is a cross between a private club and a bank that represents another arrow in Virgin’s marketing quiver.

Inside this Virgin Money Lounge, customers sit on sofas and easy chairs sipping complimentary cappuccinos and surfing the Web using free WiFi.

Howard Wheeldon, a senior strategist at London brokerage BGC Partners, is skeptical.

“It is in-depth service that matters,” he says. “Can that bank offer something that the others can’t? And I don’t mean a nice woolly seat to sit on.”

Virgin Money has one advantage that other banks can’t match: Branson.

“You have a young guy with a beard who didn’t wear suits and worked in the rock music business, and he developed an airline and people turned out to be willing to risk their lives and their children’s lives in a metal tube at 30,000 feet with this guy,” says Patrick Barwise, an emeritus professor of management and marketing at London Business School.

Having crossed that trust barrier, Branson shouldn’t have too much trouble persuading people to let Virgin look after their savings. And having bought Northern Rock well below book value, it shouldn’t be too difficult for Ross and Branson to make money. Everyone better off? Maybe. Two billionaires better off? The odds look good.

The full version of this Bloomberg Markets article is in the magazine’s May edition.

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