The Governor and Company of the Bank of Scotland
The Governor and Company of the Bank of Scotland
Sales: £1.25 billion
Stock Exchanges: London
SICs: 6012 Recognized Banks; 6111 Financial Institutions
The Bank of Scotland’s long history reaches back to 1695 when, uniquely among Scottish banks, it was founded by an Act of the Scottish Parliament; it is today one of the few remaining institutions to be created by that body. The main components of the Bank of Scotland consist of the NWS BANK pic, the group’s financial house; the British Linen Bank (acquired in 1971), a merchant banking institution; the Bank of Wales, which serves primarily corporate customers; Kellock, which provides factoring; and the New Zealand Countrywide Banking Corporation. The bank has the reputation among the United Kingdom’s financial community as a prudent, conservative bank that confines itself to core banking services while other banks explore new and various operations. At the same time, however, the bank is known as a pioneer of innovative technological services to its customers, making this small but respected bank an unusual blend of tradition and progress.
Scotland in the seventeenth century, with its sparse population of approximately one million people, was economically backwards compared with other European countries. The country’s limited economic activity centered on the exporting of such goods as wool, grain, fish, linen cloth, and plaiding, and the importing of such luxury goods as wine, brandy, fine cloths, and lace. Commercial “banking” consisted of Edinburgh’s merchants transacting business at the cross in the High Street and of the activities of the city’s goldsmiths, who gave loans and bought and sold foreign coins at their booths near St. Giles Kirk. Economic development was also held back by the fact that the country had very little currency of its own; most of the coinage in circulation was foreign, obtained from trade with other European countries, particularly Flanders and France. Otherwise, people used gold, silver, and bills of exchange (prototypes of banknotes), which were drawn on London banks.
As the century drew to a close it became increasingly clear that if Scotland’s economy were to grow and prosper to match its European counterparts, a more sophisticated system of raising capital and credit was needed. To that end a group of prominent Edinburgh merchants, aided by John Holland, a prosperous English merchant based in the City of London, proposed the foundation of a bank of Scotland. Although the proposal enjoyed little public support, it was strongly backed by men of influence, including the Lord High Chancellor of Scotland, and so came into being. Unlike the Bank of England, which had been created by the English Parliament the year before, the Bank of Scotland was envisioned principally as a trading bank, established to develop the country’s North Sea trade.
On July 17, 1695, the Scottish Parliament passed an act creating The Governor and Company of the Bank of Scotland. With the avowed intention of giving Scotland’s first bank a good start in life, the new body was accorded monopoly status and its proprietors (as the shareholders were known) were granted limited liability and allowed tax-free dividends for 21 years. The new bank opened in January 1696, authorized to lend money, discount bills, transmit money to other cities (primarily London and Rotterdam in practice), and issue banknotes from £5 to £100.
Given such a solid foundation by Parliament, the bank nonetheless had a relatively slow start, primarily due to Scotland’s shaky political atmosphere at the time. The bank did receive a boost from international tensions in 1705, however, when a French fleet appeared in the Forth. Although it was later dispersed by a storm, its ominous presence led many people to deposit their valuables at the bank for security, thus helping to establish safekeeping as one of the bank’s roles.
The Bank of Scotland widened its activities after the 1707 Act of Union with England, overseeing the Scottish Mint and supervising the changeover from Scottish coinage to sterling.
The bank’s government-granted monopoly expired in 1716, but it wasn’t until 1727 that a rival appeared on the scene—the Royal Bank of Scotland. The clash between the two banks was bitter and long, as each tried to drive the other out of business; however, neither succeeded. In any event, the spread of new banks was inevitable as the Scottish economy improved dramatically: by 1772 there were 31 different banks, each issuing its own banknotes. About this time the Bank of Scotland began to establish branch offices, opening facilities in Dumfries and Kelso in 1774 and in Glasgow in 1787. By 1793 the bank had some 18 branches throughout the country. Despite the evergrowing competition, the Bank of Scotland prospered during the nineteenth century and was prominently involved in Scotland’s economic development, helping to build Edinburgh’s New Town and playing a significant role in the rapid development of Glasgow as an important industrial center.
Scotland’s banks proved their growing power and influence in 1826 when they were threatened by the government’s proposal to limit the number of notes in circulation by allowing only the Bank of England to issue banknotes with a value of under £5, requiring other banks to use gold or silver. The move would have been disastrous for Scottish banks, including the Bank of Scotland, as many branches would have been unable to hold such reserves. Such was the resistance to the plan, however (even Sir Walter Scott, writing under the pseudonym Malachi Malagrowther, defended the Scottish £1 note), that the government retreated and Scotland retained its paper money.
By the latter half of the nineteenth century the bank was ready to move beyond Scotland’s borders; it established its first English office in the City of London in 1865. Expansion remained severely limited, however; the Bank of Scotland’s plans to move into England were thwarted by the 1875 Bank Act, which forbade the establishment of Scottish bank branches in England and vice versa. In 1868 the Bank of Scotland acquired the Perth-based Central Bank of Scotland, the first of a series of acquisitions and amalgamations designed to consolidate and further its position in Scottish banking. In 1907 it acquired the Caledonian Bank, ensuring that it began the twentieth century in a very strong position.
The bank suffered during World War I, not least from a dramatic loss of personnel—it is estimated that of the 4,198 employees who served in the war, 617 never returned. (The bank was even forced to employ women for a time, though it carefully stipulated that it did so only as a temporary emergency measure.) Following a short-lived postwar boom, economic difficulties engulfed the nation. However, the Bank of Scotland not only survived but in the 1920s enjoyed a reputation for being at the forefront of technological modernization of banking procedures. During the 1930s and 1940s this trend continued, as the bank was among the first to make efficient use of telephones, typewriters, adding machines, and the like.
The 1951 Bank of Scotland Act freed the bank from the old system under which it could raise capital only through an act of Parliament, allowing it to operate freely in the commercial market. As the decade progressed, further amalgamations and increasingly sophisticated technology brought success to the bank. In 1955 it merged with the Union Bank of Scotland. Founded in 1830, this bank had itself been active in acquiring other financial institutions, so that, with the merger, the Bank of Scotland gained an additional 200 branches. Three years later the bank acquired North West Securities (which became NWS BANK pic in 1989), a hire purchase finance house, through which it acquired the Industrial Bank of Scotland. In that same year the Bank of Scotland became the first bank in the United Kingdom to employ a centralized electric accounting system.
The 1960s saw little of note in the bank’s history, but its course of quiet consolidation and prosperity during these years left the bank poised to take full advantage of the new and superbly profitable opportunity of the 1970s—oil. Via its prominent involvement with North Sea Oil and Gas, the Bank of Scotland became known as the United Kingdom’s “oil bank,” establishing a department joining oil and banking expertise—and bringing the bank to the international stage for the first time. Prominent involvement with the worldwide energy industry led the way to participation in international banking, and the bank opened offices in New York; Chicago; Houston; Los Angeles; Jacksonville, Florida; Moscow; and Hong Kong.
The 1970s were notable for the Bank of Scotland not only because of what it did but also because of what it did not do. In 1971 the long-standing cartel agreement that had prevented Scottish banks from penetrating into English markets lapsed, but the Bank of Scotland, unlike its old arch-rival the Royal Bank of Scotland, made the decision not to establish a branch network in England. Nonetheless, the bank recognized the need to move beyond Scottish boundaries, and in the 1980s began a campaign of expansion in the South, thus beginning what the Guardian termed “one of the extraordinary growth stories of the British banking scene.” The bank maintains more than 20 offices in London and in carefully selected provincial financial centers in the South, but prefers to offer services electronically, or provide products, such as the bank’s Money Market Cheque Account, which do not require a branch presence. Such is its electronic sophistication that the bank is able to provide banking services accessed from distant locations, frequently arranged through agreements with other financial and retail organizations, including the Automobile Association and Renault. Although in some respects an Edinburgh-based bank perforce suffers drawbacks in the United Kingdom, whose financial heart is London, the Bank of Scotland’s strategy was clearly a success; indeed, from the early 1980s to 1993 the Bank of Scotland’s share of the U.K. market rose approximately from 2 percent to 7 percent.
The 1980s were a time of expansion in another significant way as, continuing its history of technological awareness, the Bank of Scotland introduced a series of new services. In 1985 it established the first Home Banking System, whereby customers could call up their account details onto their television screens or a computer. The service was expanded the following year to include businesses, creating HOBS (Home and Office Banking Service). In 1987 the bank introduced TAPS (Transcontinental Automated Payment Service), which provides electronic links to worldwide banking systems. In 1986 the bank pioneered the first major credit card to be processed in Scotland.
Despite its name, in the mid-1990s the Bank of Scotland was essentially a U.K. bank maintaining headquarters in Scotland. It operated chiefly as a retail banking service in its native land, with over 500 branches throughout Scotland. International profile notwithstanding, the Bank of Scotland remained committed to its origins. Among other functions, the bank’s International Division was active in bringing foreign investment to Scotland. The bank retained strong links with all aspects of Scottish industry, providing financial services and funding to work for a healthy domestic economy. In England, where its customers were principally in the corporate sector, it was known as a financial specialist, well respected for its expertise in project financing and management buyouts. Internationally, the bank provided specialist services. In 1988 it established a subsidiary, FISCOT, created with the three-fold aim of identifying opportunities in international trade and finance; introducing client companies to new markets and bringing them together with new business partners; and facilitating financial transactions across international borders.
Progressing into the 1990s, the Bank of Scotland continued its dual policy of steady but unspectacular advancement and creative technological improvement. Active in commercial lending, the bank continued to finance projects at home and abroad.
It increased its international presence through further joint ventures, including its financing of a retirement community in Florida, a joint agreement with the German Quelle Bank to sell credit cards to Quelle’s mail order customers, and an arrangement with a Milan-based company to move into the mortgage market.
In 1993 the Bank of Scotland was the first Scottish bank to introduce banking by telephone services, and also became the first British Visa member to offer customers the opportunity to make international telephone calls using their credit card. The following year the bank improved HOBS, making it possible for customers to conduct their own transactions via a Screenphone. Among other developments the bank also introduced statements in large print or in braille for visually impaired customers.
The bank suffered in the recession of the early 1990s along with every other British bank, but, as the Financial Times put it, the “Bank of Scotland has achieved an enviable reputation ... of being both less accident prone than others, and of running operations efficiently.” Still, the bank was particularly hard hit by bad debts in the early 1990s; its subsidiary the Bank of Wales suffered acutely. Its fortunes were once again on the upswing, however, by 1994, as the setback was overcome and profits rose healthily once more. Indeed, the bank was much admired—and envied—for its cost/income ratio, which, alone among U.K. banks, fell under 50 percent.
For the future, the Bank of Scotland planned a course of primarily internal growth, though it had not ruled out the option of further acquisitions—indeed, in 1994 there was much speculation that the bank would acquire a building society. Any such decision, however, would be weighed very carefully by this bank, which has, according to one of the bank’s senior managers (as quoted in the Independent), “rather a Presbyterian attitude, trying to improve bit by bit without any great leaps forward.”
Bank of Scotland Treasury Services pic; Bank of Wales pic; British Linen Bank Group Ltd.; Countrywide Banking Corporation Ltd.; Kellock Holdings Ltd.; NWS BANK plc.
“Bank of Scotland Pioneers Visa Phone Service,” Scotsman, September 14, 1993.
“Banks Get Phone Message,” Sunday Telegraph, April 3, 1994.
“Bottom Line: Bank Shares May Have Gone Too Far,” Independent, October?, 1993.
A Brief History of Scotland’s First Bank, Edinburgh: Bank of Scotland.
Cameron, Alan, The Bank of Scotland: An Illustrated History, 1695-1995, Edinburgh: Mainstream, forthcoming.
“Good Growth, Bad Debts for Bank of Scotland,” Guardian, May 7, 1993.
Hamilton, Fiona, “Scotland in Europe,” Investors’ Chronicle, March 12, 1993, pp. 73-74.
Malcolm, C. A., The Bank of Scotland, 1695-1945, Edinburgh: privately published, 1948.
“Markets: Bank that Stuck to Banking,” Financial Times, May 7, 1994.
“Profits Expected to Improve at Bank of Scotland,” The Times, May 7, 1993.
“Quality Shines Through,” The Times, May 6, 1994.
Saville, Richard V., The Bank of Scotland, 1695-1995, Edinburgh: Edinburgh University Press, forthcoming.
“UK Company News: A Late Victim of the Recession,” Financial Times, May 7, 1993.