The start of a British banking revolution?

After a recession and more than two years of banks receiving the wrath of consumers and politicians alike, it might come as no surprise to find that change in the sector is afoot. The British retail banking system is in dire need of a PR facelift, and some new players bursting onto the UK scene seem to be well aware of this.

These new entrants are promising to make us love our banks again, but can they really be trusted, or are they just another set of institutions looking to charge us too much and pay us too little? To find out, we've taken a closer look to find out whether or not British banking really is changing.

The new kids on the block

A month ago, the Financial Services Authority (FSA) gave the green light to 47 year-old Metro Bank, which took root in the Philippines. This makes them the first new high street bank to enter the UK since the late 19th Century.

It joins the market promising that customers will receive friendly service, 7 day opening, no ‘stupid' bank rules and even an extended invite to dogs in-branch. The company, launched by US entrepreneur Vernon Hill, aims to "build fans not customers" and to start with there will be just two branches, in London's Earl's Court and Holborn. However, there are plans to expand this to a network of over 200 in-and-around London in the next ten years.

While this is just a drop in the ocean in terms of the overall banking community the bank has created quite a stir. However, it is not alone in its plans to make big shakes in the British banking market.

Branson wades in

When an industry is in need of a shake-up, entrepreneur Richard Branson isn't usually too far behind, and just this week Virgin Money announced its intention to open 70 high street bank branches by 2015. Rumour has it that the group also has eyes for the 318 Royal Bank of Scotland branches that are being sold off under competition rules - which alone could give them a 5 per cent share in the British banking sector.

Banking with the supermarkets

Unsurprisingly, supermarkets are also getting in on the act; though have, as yet, no plans to open individual branches. Tesco Bank already claims to have 6 million customers signed up to a financial product, while M&S - a long-time player in personal finance - and Sainsbury's Bank say they have 3.8 million and 1.5 million customers respectively.

All are offering a wide range of financial products (though not yet current accounts) in store, online and over the phone, while also providing some pretty attractive incentives, such as credit cards linked to added rewards through the Clubcard and Nectar schemes. Yet, with Tesco outlining their intention to expand into current accounts next year, banking and buying your onions in one place is a frontier that looks certain to be breached before too long.

Paying the price for great service?

Despite this, Alistair Milne, a banking and finance expert at Cass Business School, doubts that the new banks will achieve lasting success with current accounts, and are likely only to have joy, as the supermarkets already have, with relatively ‘detached' products such as credit cards and savings accounts. This, he says, is due to "the major investment in systems" required to handle Direct Debits and the other mechanisms of transaction accounts.

Virgin Money is dealing with this barrier by introducing a monthly fee on its current accounts - a move which has already received a less-than favourable reaction from some quarters. Meanwhile, those behind the UK launch of Metro Bank have admitted it will not be able to offer the headline rates available with major players.

However, both appear confident that customers will be willing to sacrifice their half a per cent in interest, or even pay a fixed charge, for the promise of a more ‘reliable and stress-free' relationship with their bank - a refreshing, back-to-basics move in a world where millions of consumers are still angry at extortionate overdraft fees and mis-selling of various unnecessary products.

To illustrate, Metro's advertising mantra is ‘Love your bank at last', while Virgin Money's website promises a bank "where customers can be confident of getting a fair deal and great service".

While there is some way to go before these new kids on the block can challenge the Big Five (HSBC, RBS, Lloyds Banking Group, Barclays and Santander), there is every reason for the veterans of the industry to sit up and pay attention. What's more, there is one more new bank, not yet mentioned, that could really make them take note - the Post Office.

The Post Office Bank

At the end of March, the government committed to £180 million in funding for a new Post Office Bank, which, it was promised, would offer a variety of services available to everyone, including current accounts and savings. Raising some eyebrows were plans for a budgeting account - with which the Post Office aims to help people avoid fees by ringfencing a portion of their income - and the Savings Gateway scheme, through which low-income households will see every £1 of their savings met by 50p from the government.

In addition, there were plans for significant lending to first-time buyers - a boost that could be crucial in a marketplace where borrowing is likely to remain tight for quite some time. As Milne says, the most obvious change in ‘post-crisis' banking will be weaning the public from a reliance on "the easy loan products that we've enjoyed for a decade or more before".

Add all this to the sense of community and the ability to have a range of different services all in one place - something the supermarkets have already touched upon - not to mention the huge potential customer base, and this one move could mean the market is about to change forever.

A change for the better?

Whether these transformations in British banking are positive is debateable. We may have to pay higher rates of interest and work harder to be lent money in the first instance, all of which are likely to meet resistance.

However, in return for these sacrifices, the promise is that we'll have a fairer, more accessible market where the consumer doesn't so often feel like the little guy. Here's hoping that turns out to be true.