CYBG’s Virgin grab shows that branding matters in SME banking

The Virgin brand is coming to the SME space after all – just not in the way it originally intended to.

When Clydesdale Bank and Yorkshire Bank parent the CYBG group agreed the acquisition of Virgin Money for a whopping £1.7bn (€1.9bn), analysts’ attention was focused on what shape the resulting entities’ retail deposit would take, and what it would mean for property lending business. Scant attention was paid to the potential opportunities in for SME baking – a market CYBG was already highly active in, and Virgin Money originally planned to enter on its own.

CYBG has long provided SMEs with lending facilities ranging from basic working capital to more sectorial and complex products such as asset and invoice finance. The SME loanbook stood at a substantial £6.8bn as of December 2017, up 8% from the previous year. CYBG felt confident enough in its asset finance business to expand its base to larger corporate customers in 2011.

Virgin Money, meanwhile, had long flirted with the idea of taking its offering beyond retail customers. It originally planned to enter the market through asset finance, but shelved plans following the Brexit referendum. A year and a half later, it unveiled a roadmap to get a fully functional SME offer by 2021.

By the time the acquisition had been finalised, the only SME product Virgin Money had launched was a current account. That might have been the end of Virgin’s business banking side story, but as it turns out, CYBG had other plans. The Clydesdale and Yorkshire brands operate nationwide, but their branches are concentrated in Scotland, Merseyside and Yorkshire. Virgin Money’s branch coverage is specular and complementary to CYBG’s – but its brand pull is arguably much stronger. Which is why CYBG intends to migrate its SME products to Virgin Money.

Commercial banking is an area where branding should not come second compared to other factors – after all, firm directors want a reliable and affordable financing deal, whether it comes from a high street bank, an alternative finance provider or even a direct lending investment fund. And yet the big five banks’ continued dominance in the field means that a well-known name and a nationwide branch network count for something.

Outside of the office, SME owners are retail customers themselves. If they are thinking about a finance package, the more well-known high street brands will come to their mind first. Additionally, even in the digital age, they might favour a brand that provides an ongoing, face-to-face relationship with a local business development manager.

CYBG could have just acquired Virgin Money’s assets and go its own way. Instead, it is going to pay the Virgin group £15m a year in order to use the brand. In an age where startups with little or no physical assets can pose a threat to incumbents, that might seem like an unnecessary expense. But perhaps CYBG thinks there is another way to the SME market than brokers, peer-to-peer platforms and web search engines.