A squeezed middle? Tracking the state of the sector's finances - Unity Trust Bank
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Published by Civil Society Media
www.civilsociety.co.uk
June 2018
A squeezed middle?
Tracking the state of the sector’s finances
Also inside:
Is the charity governance model outdated?
Charities’ satisfaction with their banks
What makes an award-winning charity?
Ensuring investments are tax compliantSURV EY BAN KIN G 2 018
Creatures great and small:
An end to the Big Four monopoly?
As the government seeks to streamline the large banks and encourage the development
of smaller challenger banks, Diane Sim surveys the options open to charities.
IT’S BEEN almost 10 years since the Starling and Tandem, which were Money, valuing the lender at £1.6bn.
banking crisis but restructuring moves awarded banking licenses in 2015/16. A combination of CYBG and Virgin
continue apace as the government tries Tandem lost its banking license Money would create the UK’s largest
to strengthen the sector and prevent in early 2017 following its failure challenger bank with six million personal
a recurrence of the failures of 2008/9. to secure funding from a Chinese and business customers and a balance
The six largest UK banks by deposits conglomerate. However, it obtained sheet of over £60bn. The proposal is
– namely Barclays, Co-operative another license earlier this year with currently being considered and does
Bank, HSBC, Lloyds Banking Group, its acquisition of Harrods Bank, which not at present constitute a formal offer.
RBS Group and Santander UK – are also brought it 10,000 new customers Acquisitions and partnering strategies
currently working towards compliance and a new capital injection of £80m. – such as Starling’s link up with digital
with new ringfencing requirements And just last month CYBG made wealth manager Moneybox, and peer-
introduced by the Financial Services a takeover approach for Virgin to-peer lender Zopa’s distribution
(Banking Reform) Act of 2013. From
1 January 2019, banks with at least
FIGURE 1: BANKS USED AS PRIMARY PROVIDER BY CHARITIES1
£25bn of deposits must separate core
retail banking services from investment Charity income
banking. The move is intended to aid Number of clients < £1m £1m – 5m £5m – 20m > £20m Total
financial stability by insulating the Barclays 5 8 4 96 113
former from the riskier activities of NatWest2 3 9 3 71 86
the latter and by making large banking Lloyds Bank3 5 9 5 61 80
groups easier to resolve in case of failure.
HSBC 5 4 4 39 52
As well as streamlining the larger
players, the government is also trying to Co-operative Bank 26 11 3 7 47
develop the smaller ones – the so-called RBS2 3 5 0 38 46
challenger banks – in order to increase CAF Bank 17 8 0 0 25
competition and choice. Measures Coutts2 1 1 1 14 17
introduced in 2013 for simplifying the
Unity Trust Bank 10 5 2 0 17
process for acquiring a banking license
and lowering the capital requirements Bank of Scotland3 3 2 1 5 11
for new banks continue to bear fruit. Allied Irish Bank4 0 0 0 8 8
As a result there has been a steady Clydesdale Bank/ Yorkshire Bank5 2 1 0 3 6
stream of new entrants. They include: Santander 1 1 2 1 5
Virgin Money and OneSavings Bank, Triodos 4 1 0 0 5
which floated in 2014; Aldermore Bank
C. Hoare & Co. 1 0 0 2 3
and Shawbrook Bank, which floated
in 2015; Clydesdale Bank and Yorkshire Handelsbanken 0 0 0 2 2
Bank, which were demerged from Metro Bank 2 0 0 0 2
National Australia Bank and listed on Other 1 1 1 2 5
the London and Australian stockmarkets Total 89 66 26 349 530
as holding company CYBG in 2016;
(1) Based on data provided by 350 members of the Charity 100 and Charity 250 Indexes, plus 195 survey respondents
and Metro Bank, which made its stock (minus the overlap)
market debut the same year. (2) Part of RBS Group
(3) Part of Lloyds Banking Group
Other new entrants include privately- (4) Part of AIB Group
financed digital banks Atom, Monzo, (5) Both parts of holding company CYBG, spun off from National Australia Bank in February 2016
30 Charity Finance | June 2018 | www.civilsociety.co.ukS URV EY BAN KI N G
agreement with Saffron Building 10 years, do, however, take time Another common use is for
Society – look set to boost progress to impact on customer behaviour. deposits, as charities seek to maximise
in an already fast-growing segment As figure 1 shows, primary banking their cover from deposit protection
of the UK banking sector. relationships with charities are insurance for balances up to £85,000.
Divestments on the part of Lloyds dominated by the main four High According to The Charity Best Buy
Banking Group and RBS Group, Street banking groups, with the Table, recently launched by Savings
mandated by the European Commission only real challenges coming from Champion and Back of the Sofa,
in order to meet requirements for the Co-operative Bank and the challenger banks tend to offer better
entitlement to state aid, have also specialist banks focused on the interest rates than the high street banks
served to slim down the larger banks not-for-profit sector. on deposit accounts. It is reasonable,
and beef up the smaller ones.
Lloyds Banking Group fulfilled
its obligations by demerging Lloyds “ Primary banking relationships with
TSB in 2013 and selling is stake in
TSB Bank in two 50 per cent tranches charities are dominated by the main
in 2014 and 2015.
RBS Group’s abortive plan to four High Street banking groups ”
divest over 300 branches under the
Williams and Glyn brand by the That said, challenger banks have therefore, to expect secondary banking
end of 2017 was superseded by “an a reasonably strong showing in relationships between charities and
alternative remedies package” agreed the list of banks that charities use challenger banks to increase.
last year by HM Treasury and the in addition to their main banking
European Commissioner responsible provider (see figure 2). Additional RESPONSE LEVELS
for competition policy. Under the new banks may be used for a wide Almost 200 charities participated
scheme, RBS will be spending £835m variety of functions such as loans, in Charity Finance’s annual banking
to pay business customers to switch card payments foreign exchange survey. Small charities with annual
their accounts to competitors and transactions or trading subsidiaries. income of under £1m are well
to fund rivals’ growth ambitions. The
deal includes a £350m “Incentivised FIGURE 2: SECONDARY BANKS USED BY CHARITIES
Switching Scheme”, aimed at
encouraging SME customers to Co-operative Bank 10% RBS 3%
transfer their business to competitors, Lloyds Bank 9% Scottish Widows Bank 3%
and a £425m “Capability and Santander 7% Cambridge & Counties Bank 2%
Innovation Fund”, which will award
Virgin Money 6% CCLA 2%
grants to challenger banks and other
NatWest 5% Triodos 2%
financial services providers to increase
their business banking capabilities. HSBC 5% United Trust Bank 2%
Another recent restructuring Nationwide Building Society 5% Charity Bank 2%
involving the larger UK banks Unity Trust Bank 5% Aldermore 1%
is last year’s recapitalisation of the Barclays 4% Close Brothers 1%
Co-operative Bank, which has finally
Shawbrook Bank 4% Julian Hodge Bank 1%
cut the bank’s historic ties with its
former owner, the Co-operative Group. Bank of Scotland 3% Metro Bank 1%
The Co-operative Group’s stake in the CAF Bank 3% Other 13%
bank had been cut to 20 per cent in
2013, when the bank had to be bailed
out by private investors – mainly hedge FIGURE 3: CHANGING BANKS
funds – following the discovery of a One in seven charities expects to switch
£1.5bn capital shortfall. Last September
five hedge funds, including four of the their main bank in the next six months
original 2013 investors, completed a Do you expect to undertake a review of your main bank in the next six months?
£700m rescue deal. This reduced the Yes No
Co-operative Group’s stake to just 2018 23 77
1 per cent, which it has since sold.
0% 20% 40% 60% 80% 100%
HIGH STREET BANKS Do you expect to change your main bank in the next six months?
VS CHALLENGER BANKS Yes No
Structural changes to the supply 2018 14 86
of banking services, which have
been a recurrent feature of the last 0% 20% 40% 60% 80% 100%
Charity Finance | June 2018 | www.civilsociety.co.uk 31SU RV EY BA N K ING
represented and make up 45 per cent charity banking market as a whole, it a 28 per cent share of main banking
of the survey sample. The remainder is provides fairly comprehensive coverage relationships. RBS Group has a 35
split between charities in the £1m-£5m of large charities with annual income of per cent share split between NatWest
income bracket (34 per cent); those in over £20m and more selective coverage (20 per cent), RBS (11 per cent) and
the £5m-£20m income bracket (12 per of small and medium-sized charities. Coutts (4 per cent). Lloyds Banking
cent), and large charities with income The large charity segment is Group has a 19 per cent share of main
of over £20m (9 per cent). dominated by the big-four high street banking relationships with charities
The survey data has been banks, namely Barclays, HSBC, Lloyds in this segment, split between Lloyds
supplemented with data sourced from Banking Group (comprising Lloyds Bank (18 per cent) and Bank of
the UK’s top 350 charities, which are Bank and Bank of Scotland) and RBS Scotland (1 per cent), while HSBC
routinely tracked for the purposes of Group (comprising NatWest, RBS has an 11 per cent share.
compiling the haysmacintyre / Charity and Coutts). Together these four act The large high street banks have
Finance Indexes. as main bank to 93 per cent of charities different relationship strategies for
Figure 1 shows the primary bank with annual income of over £20m. different segments of the charities
used by charities in this sample. Whilst Barclays is the main single provider sector, and ring-fencing requirements
it does not purport to represent the to charities in this income bracket with are likely to reinforce this separation.
FIGURE 4: CUSTOMER SATISFACTION RATINGS
Relationship manager Branch services Telephone services
Co-operative 3.43 Lloyds 3.53 Unity Trust 3.67
Lloyds 3.41 Lloyds 3.25
Barclays 3.00
Co-operative 3.14
Unity Trust 3.33
Co-operative 2.52 CAF 2.85
Barclays 2.95
Barclays 2.82
NatWest 2.42
NatWest 2.75 NatWest 2.69
Overall 3.01 Overall 2.83 Overall 3.01
0 1 2 3 4 0 1 2 3 4 0 1 2 3 4
very very very very very very
dissatisfied satisfied dissatisfied satisfied dissatisfied satisfied
Internet services Sector knowledge Fees/charges
Unity Trust 3.81 Unity Trust 3.86 Co-operative 3.03
CAF 3.42 CAF 3.12 Lloyds 2.95
NatWest 3.31 Lloyds 3.00 NatWest 2.75
Unity Trust 2.75
Lloyds 3.26 Co-operative 2.96
Barclays 2.50
Co-operative 3.26 Barclays 2.71 CAF 2.41
Barclays 3.00 NatWest 2.62 HSBC 2.20
Overall 3.24 Overall 2.85 Overall 2.71
0 1 2 3 4 0 1 2 3 4 0 1 2 3 4
very very very very very very
dissatisfied satisfied dissatisfied satisfied dissatisfied satisfied
Interest rates Commitment to CSR1 Overall
Lloyds 2.63 Unity Trust 3.60 Unity Trust 3.67
Unity Trust 2.50 CAF 3.33 Lloyds 3.21
Co-operative 2.27 Co-operative 3.24 Co-operative 3.02
CAF 2.91
Barclays 2.13 Lloyds 3.10
Barclays 2.78
CAF 2.00 Barclays 2.60 NatWest 2.71
NatWest 1.85 NatWest 2.33 HSBC 1.90
Overall 2.14 Overall 2.93 Overall 2.92
0 1 2 3 4 0 1 2 3 4 0 1 2 3 4
very very very very very very
dissatisfied satisfied dissatisfied satisfied dissatisfied satisfied
(1) Commitment to corporate social responsibility Note: Banks with fewer than ten charities rating their services have been excluded. Satisfaction
ratings have been calculated by assigning responses with values and then calculating an average:
“very satisfied” = 4, “fairly satisfied” = 3, “slightly dissatisfied” = 2, “very dissatisfied” = 1
32 Charity Finance | June 2018 | www.civilsociety.co.ukSU RV EY BA N K ING
According to David McHattie, head is looking more assured, the bank is our values and ethics as the main reason
of charities, corporate banking at keen to communicate that whilst its for joining us,” says Ryan Etchells, head
Barclays: “We have completed our ownership has changed, its ethical of SME at the Co-operative Bank.
structural reform programme ahead of banking credentials haven’t. The bank’s Banks with a specialist focus
schedule: charities with income greater ethical policy, introduced in 1992 and on the not-for-profit sector enjoy
than £6.5m are served by Barclays incorporated into its constitution in a strong position in the charities
Bank plc, while charities below this 2013, means that it will turn down market, albeit not in the large charities
threshold are served by Barclays UK.” business from companies whose values segment, and have done a good job
The Co-operative Bank has just a are not aligned with its own. “Values of communicating the ethical nature
two per cent share of main banking and ethics are really important to our of their business models.
relationships with charities with annual customers: 40 per cent of 500 new CAF Bank, for example, purports to
income of over £20m. This has gradually joiners in an unprompted survey cited deliver both social and economic benefit
fallen over the last five years from six per
cent, probably reflecting uncertainties
FIGURE 7: ETHICAL BANKING
about the Co-operative Bank’s financial
future and the gradual transfer of There has been a decline in the importance
ownership from the Co-operative
Group to private investors.
that charities place on ethical banking
Now that the recapitalisation has How important to you is a bank's ethical/socially-reponsible approach to its business?
taken place and its financial future Very important Fairly important Neither important/nor unimportant
Fairly unimportant Not at all important
2018 30 42 23 41
FIGURE 5: BIGGEST COMPLAINTS
2015 34 41 20 41
Fees 18% 0% 20% 40% 60% 80% 100%
Withdrawal of services/facilities 12% How much do you value your bank's commitment to corporate and social responsibility activities?
Low interest rates 12% Very important Fairly important Neither important/nor unimportant
Lack of dedicated contact 8% Fairly unimportant Not at all important
Call centre / back-office support 8% 2018 38 37 22 3
Internet / online services 7% 2015 42 39 15 22
Understanding needs of charities 5% 0% 20% 40% 60% 80% 100%
Poor customer service 3% Do you think that banking ethically would increase your charitable impact in the eyes of your
Change in relationship manager 2% supporters and trustees?
Yes No
Lack of ethical policy 1%
2018 44 56
Other 2%
2015 46 54
No complaints 22%
0% 20% 40% 60% 80% 100%
FIGURE 6: IMPORTANT FACTORS Has ethical banking become more important to you over the last five years?
Yes No
WHEN CHOOSING A BANK 2018 34 66
2015 52 48
Good reputation in charity sector 45%
Ease of access 32% 0% 20% 40% 60% 80% 100%
Ethical / socially-responsible approach 31%
Internet/online banking 31% FIGURE 8: USE OF ADDITIONAL BANKS
Historic relationship 30% Most charities use more than one
Competitive fees 29%
bank, but not necessarily for deposits
Range of services 16%
Number of banks used in addition to the primary banking relationship
Availability of specialist charity services 15%
None One Two Three Four or more
Recommendation 14%
2018 45 36 9 3 7
Attractive interest rates on cash deposits 10%
0% 20% 40% 60% 80% 100%
National representation 6%
Credit rating 3% Do you spread your funds across more than one bank to increase your deposit protection insurance cover?
Sponsorship/support 3% Yes No
Other 3% 2018 37 63
Note: Respondents could choose more than one category
0% 20% 40% 60% 80% 100%
34 Charity Finance | June 2018 | www.civilsociety.co.ukSU RV EY BA N K ING
to its customers by gifting any profits
FIGURE 9: BANK LOANS (% RESPONDENTS ANSWERING YES)
back to its owner, the Charities Aid
Foundation (CAF). Unity Trust Bank Charities’ appetite for borrowing is in decline
focuses the use of customers’ deposits
2018 2016 2014
to fund lending where there are “clear
Does your charity 11
social impacts”, while Triodos will only
currently have 9
“lend to and invest in organisations
a bank loan? 14
that benefit people and environment”.
If not, have you 8
DIGITAL BANKING considered taking 13
out a bank loan? 14
The number of UK bank branches has
declined steadily over the last 30 years Would you consider 9
from over 20,000 in 1988 to less than taking out a loan in 16
10,000 at the end of 2017, according the next 12 months? 17
to the British Bankers’ Association. 0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
Diminishing numbers of bank
branches is a particular concern for
charities, which frequently need to FIGURE 10: OVERDRAFT FACILITIES
deposit cash and cheques collected via
their shops and fundraising activities.
Use of overdraft facilities is fairly minimal
The development of digital banking How often do you use overdraft facilities on any of the accounts you hold with your main bank?
facilities, both collectively by the sector Regularly Several times a year Rarely (for one-off reasons) Never
as a whole and by individual banks, is 2018 2 2 4 92
therefore of paramount importance.
2016 2 2 7 89
Last year’s launch of image-based
cheque clearing, which enables 0% 20% 40% 60% 80% 100%
cheques to be deposited digitally, has
been described by the Charity Finance education, charity and social enterprise “Charities can digitise paper receipts
Group as a “significant boon” for sector Nathan Whitaker says: “Lloyds by taking a photo with the app, which
charities, making payments “quicker is investing significantly in improving then extracts the information and
and simpler.” The new system, which the digital skills of its customers. We reconciles it with transactions on their
is designed to reduce cheque processing are on track with the recruitment of business account,” says Hugh Biddell,
times from six working days to one, 4,000 digital champions by the end head of charities and not for profit at
will be universally adopted for all of 2017 to help over 700,000 charities NatWest and Royal Bank of Scotland,
cheque clearing later this year. and businesses acquire digital skills.” both parts of RBS Group.
Also later this year, Barclaycard, According to research undertaken According to Neil Poynton, head
the cards and payments services by the bank, highly digital charities of charity client services at CAF Bank,
division of Barclays, plans to roll out are ten times more likely to save costs. one of the biggest industry challenges
for charities is fraud mitigation. “CAF
Bank has introduced text alerting to
“ Charities’ appetite for borrowing further enhance our online banking
security features and the CAF Bank
seems to have subsided based on Online Security Centre where we
provide advice on fraud prevention
the charities surveyed this year ” and best practice.”
the contactless donation boxes that “Lloyds Bank’s relationship managers LOAN DEMAND
it has been piloting with 11 national are now routinely equipped with a Charities’ appetite for borrowing
charities including Oxfam, Barnardo’s number of digital tools, including seems to have subsided based on the
and RNLI. The bank estimates that a Working Capital tool and a Cash responses of the charities surveyed
charities may be missing out on more Optimiser tool. This basic treasury this year (see figure 9). Poynton
than £80m in donations each year functionality is particularly important at CAF Bank says: “Loan demand
by only accepting cash donations. for charities which often carry remains but there does seem to be
At the end of last year, Lloyds significant liquidity in advance of an air of uncertainty given the political
Banking Group’s payment services future commitments,” says Whitaker. and economic environment. Brexit
division Cardnet partnered with NatWest has also recently launched has been a key factor. Since the turn
the Royal British Legion to pilot a a number of new digital services such of the year there has been a slowdown
contactless donations scheme utilising as the Receipts app, which allows in enquiries.”
200 mobile terminals for the 2017 business customers to capture and However, others observe an
Poppy Appeal. Area director for the manage receipts via mobile banking. increase in loan demand. Unity Trust
36 Charity Finance | June 2018 | www.civilsociety.co.ukSocially responsible banking. Bank with us. Bank on us. We have been helping charities like you over the past 30 years to achieve their goals; funding new or refurbished offices or projects that expand their charitable activities. We can work alongside you to help you achieve your vision by offering tailored financial solutions. Lending is available from £200k to £10m and repayable over a period of up to 20 years. Our transactional banking solutions are designed to meet your daily banking requirements with single, dual and triple authority for internet banking aligned to your internal controls. Our approach is straightforward relationship banking. If this sounds like the partnership you would like please contact us. 0345 140 1000 www.unity.co.uk/charities Unity Trust Bank plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Unity Trust Bank is entered in the Financial Services Register under number 204570. Registered Office: Nine Brindleyplace, Birmingham B1 2HB. Registered in England and Wales no. 1713124.
SU RV EY BA N K ING
relationship manager Sonya Powe bank to launch its own crowdfunding force in January as part of the EU’s
reports “a 41 per cent increase in platform. This enables customers second Payments Services Directive
loan approvals to charities in 2017”. to invest directly in equity or bonds (PSD2). Under the terms of PSD2,
Whitaker at Lloyds also notes an issued by established charities or the nine largest UK banks and
increase in demand for borrowing from businesses that have been screened by building societies are legally required
charities over the last year. “Whilst the Triodos for social and environmental to allow customer account information
vast majority of these requests are to impact. Customers can invest as little to be shared securely online with
support clients acquiring or developing as £500, and sometimes less, and their other regulated companies, subject
physical assets, we are seeing some investments are eligible to be held in to the accountholder’s consent.
organisations request working capital an ISA, so that they can receive the Though not legally required to do
facilities or growth finance to assist interest earnt tax free. so, other banks and building societies
them in moving to new operating
models,” he says.
And Biddell at RBS comments: “ Less than 20 per cent of charities
“Charities that are growing shop
networks, changing their delivery commenting on Open Banking give
models, updating CRM systems
or installing LED lighting or other it a positive reception ”
green products are increasingly
looking to match more closely the In its first three months, the can elect to provide Open Banking
cash outflow to the receipt of cost platform has raised over £7m for voluntarily. For example, Unity Trust
savings or income.” five organisations. These include the Bank is currently working towards
Social finance as an alternative Thera Trust, which aims to raise £5m PSD2 compliance with a target date
option to a bank loan has had a to invest in new homes for people with of September 2019.
fairly lukewarm reception from learning disabilities, and Rendesco, The initiative is intended to
the charities surveyed this year, which aims to raise £5.5m to develop help accountholders to access other
with many questioning its relevance green energy from ground source heat financial products and services (such
and desirability (see figure 11). pumps which will provide low-carbon as current accounts, cash management,
This is mirrored by comments heating for around 100 sites including savings and loans) which may be
made by the banks surveyed on retirement homes. more suitable for their needs based on
the appetite of charities for social The move follows last year’s their account history. The information
finance products. “Some of our launch by Triodos of a personal sharing is facilitated by Application
charity clients are looking at social current account, which has resulted Programming Interfaces (APIs), which
finance, but the speed and simplicity in thousands of new customers. enable different software applications
of banking loan documentation and, According to social and cultural to communicate with each other.
in some cases, pricing mean that loan team manager Paul Nicoll: “Our Banks interviewed in the course
finance continues to be an attractive crowdfunding platform and personal of this year’s survey are uniformly
option,” says McHattie at Barclays. account are both intended to raise positive about the benefits that
Whitaker at Lloyds observes: the profile of impact investment Open Banking will provide charities.
“Our relationship managers are with retail investors and depositors, “Open Banking has, first and foremost,
often asked to discuss social finance thereby increasing the funds available been developed with the consumer
with charities, but the majority of to organisations that create social and in mind,” says Biddell at RBS.
our clients tend to find commercial environmental benefit.” “Increased competition leads
borrowing arrangements from the to originality and creativity, with
bank more simple and cost effective for OPEN BANKING organisations incentivised to launch
straightforward borrowing requests.” Another government initiative offers and services that set them apart
A groundbreaking initiative in this intended to increase competition from the competition. This means
area comes from Triodos Bank, which and choice in the UK banking market that the consumer benefits from
earlier this year became the first UK is Open Banking, which came into personalised deals that match their
needs,” he adds.
For their part, the charities
FIGURE 11: SOCIAL FINANCE
surveyed this year are less sure.
There is only limited interest in social finance Less than 20 per cent of charities
commenting on Open Banking
Have you considered social finance as an alternative option to a bank loan?
give it a positive reception, with
Yes No Don’t know
the remainder expressing uncertainty
2018 17 69 14 or concerns over security and privacy.
2016 21 69 10 Lack of awareness, however, is the
0% 20% 40% 60% 80% 100% main problem, reflecting the fact that
this is still a very new development.
38 Charity Finance | June 2018 | www.civilsociety.co.ukYou can also read
