Money: Post link spreads Co-op's message

The Co-op Bank is small but growing - and its ethical stance is a winner with customers, writes Paul Gosling

The Co-operative Bank will this week announce a deal giving its customers access to the country's largest network of branch offices - the Post Office. Current account holders with the Co-op will be able to pay in cheques and withdraw cash at any of the Post Office's 19,000 branches, including rural sub-post offices.

This is not the first banking tie-up with the Post Office, as Alliance & Leicester Girobank customers can already use Post Office branches, and the Co-op has been piloting its arrangement in the North-west. Some industry analysts expect the Post Office to sign similar contracts with other banks in coming years, moves which might console customers unhappy with bank branch closures.

The Co-op's announcement will mark a further phase in its phenomenal recent growth, and in the transformation of what was widely regarded 10 years ago as one of the most incompetent banks into one of the best.

Which? magazine this month rated the Co-op Bank as one of the three best for overall customer satisfaction. Its current account, which is primarily operated by telephone, was itself not rated a "best buy": it does not pay interest on accounts in credit, for example. But a survey of 4,000 Which? readers found that 84 per cent of First Direct customers were very satisfied, followed by 62 per cent of Alliance & Leicester's and 60 per cent of the Co-op's, compared with just a third of people who banked with Barclays and NatWest.

The high level of satisfaction with the Co-op may in part reflect the fact that it is the only bank that offers automatic compensation of pounds 10 if it makes a mistake on transactions. Much of the bank's recent growth in profile and popularity also reflects its rebranding into an ethical bank. This came out of a customer survey in 1991 that found that 20 per cent of its new customers had chosen to bank with it because of its ethical stance. This was news to executives because, apart from a refusal to trade with South Africa, at that time it had no ethical policy.

However, the survey showed the potential market for a truly ethical bank. A marketing campaign followed, which pledged that the bank would not lend money to any business engaged in any of 14 unethical activities. These included selling weapons to oppressive regimes, damaging the environment, factory farming and testing cosmetics on animals. The bank also pledged that it would not speculate against the pound.

The stance has undoubtedly been successful in attracting custom. The number of Co-op Bank customers has risen to 2 million and the value of their deposits increased from pounds 700m to pounds 2.8bn. The bank, however, remains a relatively small player nationally, with 3 per cent of the current account market and 5 per cent of the credit card market.

It is one of the biggest issuers of "affinity cards", which typically give 0.25 per cent of transaction value to a nominated charity, such as Oxfam and Amnesty International. The Co-op's affinity cards carry no annual fee, although interest rates are nothing special.

For regular credit card borrowers, as opposed to those who pay off their accounts in full each month, the Co-op's Visa Advantage card (with no charity link) which has an interest rate of just 10.9 per cent (7.9 per cent for the first six months) is well worth considering, and was rated a best buy by Which? It is clear that, for at least one bank, there is money to be made out of the ethical market, and it is a lesson being learnt by the Co-operative Wholesale Society, which owns the bank. The CWS is attempting to turn itself into an "ethical retailer", starting with a campaign to promote more honest labelling on products and a move away from intensive farming methods.

Simon Williams, head of marketing at the bank, says: "Ethical consumerism is growing. There is greater scrutiny of corporations and an expectation that corporations should have values." A survey earlier this year showed that the bank's customers are deeply committed to its ethical approach to commerce - 86 per cent believed that businesses have obligations beyond just making money and should be in partnership with customers and staff.

The bank has, however, cut its own staff, although this has been achieved without any

compulsory redundancies. It closed 15 branches and opened 15 new ones, some fully automatic. The bank has just 400 bank branches (compared with the thousands still operated by the traditional big four) and 250 of them are within Co-op stores. Customers can also use 14,000 Link and NatWest cash machines free of charge, and they can withdraw money from Co-op shops using their debit cards. But the Co-op concentrates on telephone banking, which is available to all customers as part of their basic banking service.

The Co-op Bank, wholly owned by CWS, is not itself a mutual body, so there is no possibility of customers receiving a windfall bonus should the bank be sold. But it is a part-owner of Unity Trust, the trade union bank that hopes to manage a new generation of "credit unions" being formed by trade unions. These offer low-cost loans to members.

The Co-op plans to associate the bank's name with good causes with which potential customers can identify. This began with newspaper advertisements coinciding with publication of the Scott Report, alleging that rival banks had financed arms purchases on both sides in the Gulf War. With the RSPB, it has launched a campaign to protect endangered species.

This is the first in a new series looking at the expanding area of ethical finance. Next week we will be looking at credit unions.