Richard Branson, the hot-air-ballooning British magnate who extended his Virgin brand from entertainment to transportation, has set his sights on financial services-and maybe even on U.S. opportunities in that market.
Mr. Branson-who made his entrepreneurial mark through Virgin Records, Virgin Megastores, and Virgin Atlantic Airlines-is using Virgin Direct Ltd. as his financial services vehicle. He is chairman of that unit, set up in March 1995 as a fifty-fifty partnership with Australian Mutual Provident Society.
Virgin Direct has more than 200,000 customers in the United Kingdom and $1.67 billion under management. It offers personal pensions, life insurance, and personal equity plans.
Because it lacks a banking license, Virgin Direct turned to Royal Bank of Scotland to provide the everyday aspects of a personal financial portfolio. The result, being rolled out this month, is Virgin One, a package that can include mortgage, credit card, personal loan, and transactions all in one account.
All borrowings through the portfolio would be at relatively favorable mortgage interest rates, from 8.1% to 8.95%.
"There is nothing like this in the U.K. market," said Peter Woodifield, deputy head of media relations at $116 billion-asset Royal Bank of Scotland.
"We only got into the business to do a better deal for the customer," said Rowan Gormley, managing director of Norwich, England-based Virgin Direct. "We wanted to have a bank account that adapted to people's lifestyles, not have people's lifestyles adapt to their bank."
He added that the company is "actively thinking of entering the U.S. market-but we would do so only in conjunction with a U.S.-based partner."
He said that when the idea initially was floated, most bankers' response was "you can't" or "you don't understand," but the reply from Royal Bank of Scotland, which has been in the direct financial services business on its own, was "refreshingly different and far thinking."
Virgin Direct is targeting England. Because the Edinburgh-based Royal Bank, the sixth-largest commercial bank in the United Kingdom, has just 1% of the English mortgage market and 2% of the English retail market, the Virgin venture does not "cannibalize its customer base," Mr. Woodifield said.
The cost of launching Virgin One is $16.7 million, half of which will come from Royal Bank. The bank will provide all the banking facilities and will hold all the Virgin One accounts.
Customers can call one telephone number, 24 hours a day, to take care of all their banking, card, and payment services.
To be eligible for the account, one must be a Virgin Direct customer (until the service is offered more widely next year) and a property owner. Paychecks must be deposited directly into the account, and the depositor's home must serve as loan collateral. The property must be valued at least at the equivalent of about $83,000.
As currently structured, Virgin One is a play for mortgage assets. Once the home is appraised-at the customer's expense-the mortgage can be switched to the Virgin One account and a credit facility opened, initially up to 95% of the value of the property.
Many traditional lenders charge a premium to people who want to borrow more than 75% of the property value, but Virgin One does not.
The debt can be paid off at whatever speed the customer desires, as long as the credit limit is not exceeded and the debt is repaid by retirement age.
Each month, Virgin One customers receive a statement showing the value of the home, transactions made, and the final balance. It also will tell them how much they have to pay in interest on their total debt-a sum that will be automatically deducted from the account 25 days later.
Virgin One works on the principle that it is more cost-effective to pay off debt than to save money because of the differences between lending and savings rates. Also, tax is paid on interest earned but not on interest saved.
Virgin Direct management expects business to be brisk. There are 18 million mortgageholders in the United Kingdom out of 22 million households. Twelve million of those mortgageholders have houses that meet Virgin Direct's minimum valuation requirement. "This account would suit the average U.K. household," Mr. Gormley said.
"Anyone with a mortgage is in debt," he added. Often people have unsecured loans at high rates and cannot extend their mortgages to refinance them, he said. "In effect, they are making charitable donations to Britain's banks of 20%"
Virgin One will allow them to roll mortgages, unsecured loans, and savings into what is, in effect, a tax-free account.
Mr. Gormley did not rule out the possibility that Mr. Branson's foray into banking could lead to his making on-line banking services available on Virgin airplanes or in retail locations. "The opportunities are definitely there to let people access Virgin Direct in lots of different ways," he said.
Virgin One is Royal Bank of Scotland's third joint effort with a nonbank within the past year. Last November it entered a partnership with the life insurance company, Scottish Widows. In February, it joined with Tesco PLC, the United Kingdom's largest supermarket chain, to offer savings accounts, credit cards, loans and mortgages.
Tesco's archrival, Sainsbury's, similarly entered the banking business in a joint venture with Royal Bank's competitor, Bank of Scotland. Because it obtained a banking license, the supermarket can call its telephone- oriented institution Sainsbury's Bank.
A report in September by the research firm Datamonitor Europe showed that nonbanks such as Sainsbury's and Scottish Widows have attracted $2.5 billion of deposits. Their brand names and competitive rates were seen as marketing advantages.
Even though these ventures have a mere 0.3% of the U.K.'s personal deposits, "given that most of this growth has been generated in the past year, this is phenomenal progress," Datamonitor said.