Can the Co-op be a new force for good?

Lloyds has agreed to sell the mutual 632 of its branches. Will it help turn the bank into a serious rival?

The once-tiny Co-operative Bank is set to have nearly 1,000 branches when the £350m, rising to £750m, agreement to buy a large swathe of Lloyds Banking Group's network completes next year.

The deal to buy 632 branches, which has yet to be approved by the City regulator, the Treasury and the European Commission, will give the Co-op a huge high street presence, catapulting it into being a "challenger" to the traditional big names of Barclays, HSBC, Lloyds, NatWest and Santander.

In fact, the battering the big names have taken in recent weeks, after the RBS/NatWest computer cock-up and Barclays' Libor scandal, has seen a 60 per cent increase in the number of people switching to the Co-op.

"People have been taking a personal stand against bank scandals and moving their money to local, ethical or mutual financial institutions that they feel they can trust," pointed out Liberal Democrat MP Susan Kramer.

"The Co-op, and other local, ethical or mutual banks, have a vital role to play in making our banking sector more diverse. This deal will help throw open the retail-banking market, give a boost to mutual banking and help the industry move back to responsible banking that benefits the wider economy."

People are attracted to the Co-op by its ethical credentials. But can it maintain its reputation after it triples the size of its branch network? Will it be able to manage control of 7 per cent of the current account market, bearing in mind that it has a relatively paltry 2 per cent now?

Last year, the Independent Commission on Banking said that any one bank hoping to challenge the existing "elite" has to have a strong enough presence in the market to provide a real alternative.

It said then that the only real challenger brand in the UK was the Nationwide building society.

But once the Lloyds deal goes through, the Co-op will have the sixth-largest bank branch network in the country. In Scotland, it will become the third-largest bank in terms of branch network.

But will the growth mean leaving behind its beliefs? No, says the Co-op. It was quick to reinforce its ethical commitments this week, a policy that ensures it never invests in nor does business with unethical companies. Specifically, it refuses to do business with arms manufacturers, those with poor labour records, and companies which develop high climate change emissions fuel.

Sarah Brooks, director of financial services at Consumer Focus, said: "The Co-operative Bank must use its new status to provide a real alternative to other banks with a focus on straightforward products and excellent customer service. Co-op must offer a point of difference and not just more of the same offered by the big five banks."

Co-op boss Peter Marks said: "We believe that this deal will help restore trust in a sector whose image has been badly tarnished over recent years and would allow us to genuinely challenge the status quo on the high street."

Kevin Mountford, head of banking at MoneySupermarket, approved.

"Hopefully, it will be the antidote the sector needs and encourage a culture of switching as the needs of the customer, and not the shareholders, come to the fore," he said.

The 4 million or so Lloyds customers who will be switched to the Co-op may not be so happy, especially if they are asked to leave behind a decent, low-rate mortgage deal.