Showing his rivals a clean pair of heels

By Ian Fraser

Published: Sunday Herald

Date: March 17th, 2002

FINANCIAL services and washing powder may not seem the most Gordon Pell; image courtesy of Daily Mail obvious of bedfellows. Yet Gordon Pell’s model of retail banking arguably emulates something that giants such as Procter & Gamble have been doing for years.

The detergents approach is to have one vast factory churning out soap suds, which creates massive economies of scale. The suds are then packaged and branded — with subtle tweaks to formula, scent and pack design — to appeal to different groups of consumers. So Procter & Gamble’s Ariel, Bold and Daz competes against Lever’s Persil, Surf, Comfort and Lux.

By the same token under Pell — a career banker who spent 28 years at Lloyds Bank before transferring to NatWest and then to its new owners Royal Bank of Scotland — RBS now has a single 20,000-strong “manufacturing division” whose main role is to develop “raw” financial products that can be packaged and sold under different wrappers. These include RBS, NatWest, Direct Line, Ulster, Lombard, Tesco, VirginOne and Coutts.

The model has worked well for the detergents giants. Between them they have carved up the global market, and the early indications are that it is rubbing off for RBS.

Pell says: “Our strategy is that we have a common manufacturing platform, from which we pump out many brands. In other words we do personal loans in at least six brands, including NatWest, Royal Bank, Tesco Personal Finance, Direct Line, Lombard Direct and Coutts.”

“These are distributed differently, with different pricing, for different markets.” For example, Pell said that the “offset account” NatWest One is a “respray” of Virgin One, as is Royal Bank’s current account mortgage. He believes such accounts will make up 30% of the market within a couple of years.

“Lloyds TSB is a brand imperialist, meaning everything has to be the same shade of blue and green. This makes it vulnerable to attack from lots of people around the edges, who can pick off bits of its market. You can’t respond to them because absolutely everything has to be uniform.

“The advantage of having lots of brands is I can deal with the interlopers and I can be an interloper. The mindsets are dramatically different.”

When cold-called by Sir David Rowland, the chairman of NatWest, in late 1999, who wanted to hire him with a view to bolstering the bank’s defence against Royal Bank of Scotland and Bank of Scotland, Pell jumped at the chance: “There was nowhere else to go within the Lloyds group.”

Soon after RBS had NatWest in the bag in February 2000, Pell had lunch with RBS chief executive Fred Goodwin at the City Rhodes restaurant. “Fred paid the bill. I hadn’t realised there was any symbolism in that. But now I realise that there was,” says Pell.

It turned out the two bankers had remarkably similar visions of how the NatWest brand might be re-energised after years of neglect. Soon afterwards, Pell emerged as chief executive of RBS’s enlarged retail banking division.

“There had been a very clear view in NatWest that retail banking was yesterday’s business and that it was all about cost reduction. But it had a superb franchise, which was what I found so bizarre. How could they have reached the conclusion that a superb franchise was going nowhere?”

NatWest had a very strong customer base, which included the highest number of ‘AB’ customers, meaning those from the upper socioeconomic groups, of any UK bank. But Pell believes the emphasis on cost reduction meant NatWest had “lost track of their franchise and of the fact that they were really managing a sales force and not a load of bank clerks”.

Explaining why RBS decided to retain both brands, he says: “It made sense because there was so little overlap. I had managed the merger of Lloyds and TSB. There, the logic was clear, as 600 branches were within 100 yards of each other. With Royal and NatWest it was 100 if you pushed it. One of our great successes has been running both brands.”

Pell says that each retains its own distinct identity and advertising agency. He adds he has doubled NatWest’s television budget from £10 million to £20 million. “NatWest’s whole mindset was cost reduction. Our mindset is income growth and customer growth,” he said.

Two changes Pell quickly implemented at NatWest were to halt a branch closure programme and to reverse a programme which would have made it impossible for customers to speak to their branch by phone.

“Research shows customers prefer to ring a branch, even if it takes longer. We are gradually moving the calls back to the branches and we will have finished that by June.”

Pell is proud of how RBS as a group is pulling away from its peers in the UK retail market. “If you add up the retail banks of all the other banks, their total profits growth was under £100m in aggregate. But the retail profit growth in Royal Bank was something like £300m.

“The other banks have infrastructural issues, such as too big a mortgage book. They’ve also got cost programmes they are trying to drive through, they’ve got too much life insurance, they’ve got big low-margin lumps of business in their books.

“But we grew our customer base by 7% last year — across both brands. And why did we do that? Partly because we’re getting the natural distribution capability of NatWest back up to where it ought to be.

“It is also because we are still a bank. The beauty about the new Royal Bank is that it is now split roughly 50/50 between corporate and retail banking. The retail businesses are like the lead ballast in the bottom of the boat. The corporate business is like the sails that bring speed — but the ballast avoids you tipping over.”

Pell is unruffled by comments from some analysts that RBS has gaps, notably in insurance and mortgages.

“Let me start by saying thank God I haven’t got a big life assurance business at the moment. One reason some banks have had some pretty awful results is they own big life businesses. There is an issue about whether a bank is the right owner for a life business. But that does not prevent a bank from being a big distributor of life products.”

He believes that RBS’s insurance joint venture with CGNU is a better model as it does not expose the group’s balance sheet to collapses in the value of a life company’s main fund — as recently happened to Lloyds TSB. “We help specify the products, we manage the sales force and CGNU manages the life fund.”

Pell is also delighted to have limited exposure to the mortgage market, and effectively rules out the idea that RBS should buy a mortgage brand. “The mortgage market is a vipers’ nest. It would be naive to think you can stick your hand in there and not get bitten.

“I only sell mortgages when I can make money. I’m a bit old- fashioned about these things. If people want to compete with me on a basis that they will lose money, they will get their come-uppance in heaven and all I have to do is hold my breath.”

Pell is sceptical about interest-bearing current accounts, such as those recently launched by HBOS. “Halifax have either found something very new and interesting or it’s a marketing gimmick and eventually they will try to take the interest down to virtually nothing.”

Rather than pursue the holy grail of increasing products per customer from 2.3 to 2.4, Pell prefers to grow his customer base. “My reaction is leave it at 2.3 and let’s have twice as many of them. Do the maths on that!

“Increasing products per customer is a bit like building the pyramids. It’s a 300-year exercise because customers are dying every day, they’re getting married and repaying their mortgage.”

Nor is he worried about the launch of new private banks which could take business away from Coutts and Adam & Company (both subsidiaries of RBS).

“Coutts is doing very well for two reasons. It has a good banking business which has been growing very fast and secondly it has been developing a wealth management which has been going very well. That wealth management business is based on today’s model — we provide you with an excellent service and you provide us with a fee for it.

“Bankers have this gathering swine instinct and every CEO thought I have to be on this [wealth management] trend. Those who didn’t have either brand or competency forgot they have neither brand nor competency and tried to create it in a rush. And they got found out quickly.”

But how does Pell, an urbane Englishman, find working with Scots such as Sir George Mathewson and Fred Goodwin, who are renowned for their take-no-prisoners toughness?

“The Scottish management style is quite direct and I enjoy that. There are moments though when you think this is a bit like the jungle. But they get things on to the table quickly. We deal with them quickly, then we move on.”

Does Pell harbour any ambitions to be the heir apparent at RBS?

He jokes: “I don’t think I’ve got the right genetic code or the longevity. I think it would be pretty revolutionary if the next chief executive was not from Scotland. And anyway, Fred’s nine years younger than me.”

Gordon Pell Biography
Gordon Pell, the 52-year-old head of retail at the Royal Bank of Scotland, is well qualified to speak on the future of UK banking. He spent 28 years at the powerhouse that was Lloyds Bank before moving to NatWest in 2000. Soon afterwards Pell became the only senior NatWest executive to be appointed to RBS’s board. He has been instrumental in enabling RBS to steal Lloyds’ mantle as the UK’s most successful retail bank. Born in India, Pell moved to England aged six and went to Wellington College and Southampton University. In his spare time he shoots clays and looks after his three teenage children. Wife Marian is a partner at City solicitors Herbert Smith.

Copyright SMG Publishing Ltd. 2002

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