After a long weekend of sun comes something else quite unexpected. The news that CYBG PLC has made a takeover offer for Virgin Money.

It’s a bold move for a banking player that’s made few headlines and rattled even fewer cages since floating on the London Stock Exchange (LSE) in 2016. And while it’s certainly not a ‘done deal’, in this blog post we’ll share our first thoughts on this proposed tie-up.

But first, just who are CYBG PlC?

CYBG PLC is better known to UK consumers by the three brands it operates: Yorkshire Bank, Clydesdale Bank and B. In 2016 it was divested from its parent company, National Australia Bank, and floated on the LSE.

And who are Virgin Money?

Virgin Money became a national force in the savings, mortgage and credit card market after gobbling-up the good bits of Northern Rock, and it retains a strong footprint in the North East. Through a combination of good deals, eye catching marketing and high level sponsorships, Virgin Money has developed a pretty strong banking brand.

Not long ago Virgin Money was itself rumoured to be considering a bid for part of The Co-op Bank, although this failed to materialise, along with any real interest from other UK financial firms.

So why now?

Banking is getting more competitive and CYBG has said that it “believes the combination would create the UK's leading challenger bank offering both personal and SME customers a genuine alternative to the large incumbent bank.” It would certainly have a lot of customers – over 6 million personal and business accounts.

But to truly become a “leading challenger bank” the combined group would need one epic current account proposition…something which neither CYBG or Virgin Money really have. And whether you subscribe to a traditional retail banking strategy of cross-selling products once you have a consumer’s current account, or prefer to think of the future of banking as more of a marketplace like Starling or Monzo, having a customers primary current account remains key to building a value-add relationship.

CYBG tried to make a dent in the current market with the B Account a few years ago, but the most recent current account switching service data (Q3 2017) shows that CYBG actually lost 6.7k current accounts in this period. Only Halifax, Nationwide Building Society and TSB made a net gain in their current account volumes…although one might expect TSB’s figures to drop in Q2 2018, given the recent IT meltdown. Virgin Money is grouped alongside a list of a dozen or so ‘low volume participants’, but its current account proposition is widely viewed as pretty basic.

And although Virgin Money has a cool mass-market brand, its digital game continues to lag behind many banks - new and old. For example, it remains an app-free zone – be it for customers wanting to check their mortgages, credit card balances, or anything else really. This is due to be addressed by the Virgin Money digital bank, effectively a new digital bank - £38m was spent on its development in 2017, and it was due to go live in the ‘second half of 2018’.

The cons?

The geographical spread of these banks makes it hard to see how job cuts wont be part of the ‘substantial synergy potential’ cited in CYBG PLC’s press release. After all Clydesdale Bank has its head office in Glasgow, while Yorkshire Bank is based in Leeds. Virgin Money has its biggest office in Newcastle, with Edinburgh, Norwich and London also important centres of activity.

Our take

There’s little doubt that economies of scale can be helpful in an increasingly competitive market. But without a killer current account proposition, the UK’s largest banks really won’t have much to fear from this tie-up.

Operating four banking brands with broad mass-market appeal will be an interesting challenge too. After all most new banking and indeed FinTech firms design and build propositions geared to increasingly well-defined audiences. There is a real risk that the CYBG/Virgin Money tie-up will leave something of a hodgepodge of banking entities if a mighty strong plan and even stronger leadership are not in place. But whether this deal completes or not, it’s likely to speed-up greater consolidation across the banking sector.