Metro Bank opened with a fanfare, promising better customer service in a sector still reeling from the financial crisis. Can it deliver, and will other new players in the field force High Street giants to rethink their game?

When Metro Bank launched the first new High Street bank in the UK for more than 100 years it opened up the field to new entrants in a market dominated by larger banks. At the end of July, Metro unveiled its first "store" in central London with another opening last month. Both Tesco and Virgin Money are set to follow while New York-based JC Flowers is in talks to take control of Kent Reliance Building Society and City veteran Lord Levene is working on "project new bank". Another new bank, Aldermore, was set up last year to plug the gap in business lending.

Available data suggests this is a good time to launch a bank. In a Uswitch survey, 66 per cent blamed existing banks for the financial crisis while half of the respondents said the newcomers would be a breath of fresh air and 37 per cent expected them to be innovative and improve the sector.

"Now is a good time for new entrants to come into the market because there is a question mark for customers over what they get out of the relationship with their bank," says Steve Davies, retail banking partner at PricewaterhouseCoopers. "You see pressure on organisations that have a traditional banking platform. From a new-entry perspective, you have an opportunity to be more competitive and compelling in terms of what you are putting in front of the customer."

But the Uswitch survey indicates that new players will not find it easy to establish themselves. While 57 per cent of customers said they welcomed having an alternative to established banks, just 38 per cent would consider moving their account. "The rate at which customers change banks is very low; most studies show that under 10 per cent of customers do so," says Davies.

The people behind Metro are confident they can take market share. Co-founded by Anthony Thomson and Vernon Hill, the philosophy is simple: a better customer experience. This includes seven-day-a-week branch banking, extended opening hours, friendly customer service, welcoming branches without security screens, free self-service coin-counting machines, and instant issue of credit and debit cards—they aim to set up accounts and transfer direct debits in 15 minutes.

All this comes at a price and the lower than average interest rates have received a lukewarm welcome. But Hill thinks few customers are attracted by rates. "Only six per cent of British customers say the rate is the number one reason for choosing a bank," he says.

Hill set up the hugely successful Commerce Bank in the US on the basis of offering better customer service. He started Commerce in 1973 with one office, $1.5m (£950,000) in capital and nine staff. When the bank was sold in 2007 for $8.5bn (£5.3bn) there were 15,000 employees. The Metro founders met in 2000 when Thomson was running the Financial Services Forum in the UK and visited Commerce Bank, determined to discover the secret of its success. But it was Commerce's expansion into the Greater New York area that caught his imagination.

When Commerce went into New York it was a mid-size bank with 250 stores and about $8bn (£5bn) of assets; over the following six years it grew, mainly because of the New York effect, to $50bn (£31bn) in assets, and from 250 to 500 stores. What interested me was that London had a lot in common with New York and I became excited at the thought of bringing this model to London," he says.

When Hill sold Commerce the pair made plans for a London bank and won a banking licence earlier this year. Hill says the timing is perfect. "Customer satisfaction numbers in Britain are so poor; most major banks have failed and the level of service on the consumer side and the small-business lending side is awful."

He is confident that Metro can grow by taking market share. "Big banks believe that the retail banking business is a no-growth business and you see that in the extreme in Britain. Once they get to that point they begin to cut costs and disinvest, and whether it is here or in the US the result is the same. We have proven over the years that this can be a growth business by taking market share from the competition. We over-invest in the business where our competition is disinvesting."

Metro's business will be an even split between retail and business banking, focusing mainly on SMEs. "We will offer businesses the same as we offer individuals: a better experience," says Thomson. "A lot of research suggests that the SME market is even more dissatisfied with banks than consumers, which is hard to believe because consumers are pretty cheesed off."

In January, Virgin Money bought the small Church House Trust bank four months before dropping out of the bidding to acquire the 318 RBS branches for sale (later bought by Santander). Sir Richard Branson's financial services company currently offers only credit cards, loans, savings and insurance products, but expects to have a full range of products available by the end of 2010 and plans to open 75 new branches over the next five years. Chief executive Jayne-Anne Gadhia has ambitious plans; she said earlier this year that Virgin Money wanted to shake up the banking market.

What every Virgin company has in common is putting the customer first, particularly in markets where consumers haven't been given the best of deals and we know that is true in the banking market," she says.

Gadhia says Virgin aims to be different in three areas. "We need to make sure all products are transparent; for too long banks have got away with hiding charges in the small print and customers have suffered," she says. "We'd like to return to old-fashioned service. Branches, in particular, have got to a place where, in order to increase efficiency, they treat people more like business units than human beings." She says many consumers are foisted off to call centres that don't know them. Virgin, too, is planning to place more focus on branch managers. "We want to return to a place where branch managers are able to make more decisions and can build closer relationships with customers."

Gadhia knows she may have to build the network from scratch. "None of us can take acquisitions for granted, but with the government assets that are available at the moment we have been looking at the possibilities they bring and we remain interested," she says, adding that she's surprised to see Santander buying the RBS branches.

"This will make them one of the biggest banks in the country and I don't see how this is good for competition. The more the very big banks can continue to grow, the more the lack of transparency and poor service is going to be perpetuated. I think it will be interesting to see what the government does to encourage competition through their own asset sale."

Brett King, author of Bank 2.0, is not convinced by the increased focus on branches and customer service. "I am not sure that coming out with a new branch network is the answer, even if it is with extended hours. The core problem that banks have is that they don't understand their customers and if you look at the behaviour of customers, branches are a very minor part of the equation," he argues.

"Customers are not asking for old-fashioned branch banking right now. The primary driver in the past for using the branch was that it was close to your home or your office—it was the convenience factor. But today the most convenient channel is the internet or, increasingly, the mobile phone." So how do existing banks feel about the new competition? First Direct, which set the bar high for customer service when it launched telephone banking in 1989 before adding a Web service in 1998, says new banks are welcome. "It is important that customers have a choice and anybody who challenges the sector to raise their game is a positive thing," says Paul Say, head of marketing at First Direct.

"We have a targeted market, not everybody wants to bank online or on the phone; they want to see someone face-to-face, so I do think there is room for very different propositions in the market. Do I think the main banks are concerned about Metro Bank or Virgin Money? Yes, but in a healthy way, not in a fearful way."

King believes that First Direct will have more opportunity to take market share than the likes of Metro and Virgin. "I think their focus is a winner. We are all time-poor, we all just want to get it done and it is going to be the easiest way to get from A to B that we choose in most cases," he says.

Someone who knows the Metro model well is Deanna Oppenheimer, chief executive of Barclays UK retail bank. Having spent most of her career in her native US, she has seen the success of Commerce first-hand but is relaxed about the competition. "When new entrants come into the market the banks that have the most to lose are the ones that are the least well-positioned business models," she says. "We have been adding market share, and increasing our customer base and employee engagement. We began four years ago to invest in branches, introducing an open-counter concept, and we have renovated 50 per cent of our branches so far."

For King, the biggest problem for banks is the culture and the resistance to innovation. "They have so much organisational inertia that trying to get them to change is a nightmare, trying to get them to adapt, be innovative and have a different approach is so hard," he says. "You can't get a banker who has been brought up on a staple of branch banking over 40 years to think differently. You need generation Y, the social media guys and the mobile experts to be in manager positions, influencing strategy, but you look at the big banks today and that is sorely absent from the board."

He believes banks should be exploring mobile banking rather than focusing on branch services. "A few people are doing it, but not on a large scale. In the US, Bank of America has been hugely successful and it has more than four million customers who use mobile banking every day; it has brought in 150,000 new customers just because of the availability of mobile banking."

The reason mobile banking is not more widespread in the UK, according to King, is the people at the top. "In the UK, the leadership of the banks is [dependent on] old-school bankers who believe that the branch is the premier way of contact for the customer," he points out. "They need to start thinking that the customer is no longer just a single-channel customer; they are more complex than that."

Aldermore throws a lifeline to small business

Another new player is heeding calls from business secretary Vince Cable and chancellor George Osborne for banks to lend more to businesses. Aldermore—backed by Anacap and Morgan Stanley Alternative Investment Partners—was set up a year ago to fill the gap in lending to SMEs.

"This is a market we believe the larger banks have not served well in the past and they don't listen to or understand the needs of the SME customer, which is precisely our focus," says deputy chief executive Mark Stephens, right. "The banks just took business customers for granted and lost their focus on the requirements of small businesses. We have to accept that as an industry we are providing them with a service and a raw commodity, money, and we have lost sight of the customer service."

Aldermore has nine offices and 8,000 customers in the UK but has plans to expand. "We are finding that people like our proposition and we have been very successful in getting new customers," Stephens adds.

He says Aldermore sees many sound firms that have been turned down for credit by other banks. "Banks say they are actively lending but we see examples every day where very good customers and credit propositions have been turned down," he says, insisting that Aldermore is not taking more risks than other banks. "We have a conservative approach to risk but we understand the sector in which we are lending."