On 20 January 2022, the Financial Conduct Authority (FCA) published a strategic review of retail banking business models (Strategic Review).
The Strategic Review updated the FCA’s previous strategic review that was published in 2018 and explored new developments since 2015.
The Strategic Review found that, despite the impact of the Covid-19 pandemic, digital challengers had continued to increase competition in the retail banking sector. In fact, the pandemic had accelerated the move to digital channels and the digital transformation of the incumbent banks. This transformational digitalisation has increased choice and lowered costs for banking customers – including retail consumers and small businesses.
In this FinBrief, we summarise the key findings of the Strategic Review.
Increasing Competition
The large banks such as LBG, Barclays, HSBC and NatWest are increasingly seeing their historical advantages eroded due to innovation, digitalisation and changing consumer behaviour. The gap in profitability between large banks and digital challengers has continued to reduce.
Digital Challengers
Traditionally, new entrants in the banking sector suffered from high barriers to growth which made it expensive and slow to build market share.
Digital challengers currently make up 8% of the market for personal current accounts (PCAs). They have been able to attract customers by offering innovative mobile applications which make banking easier and more convenient. Incumbent banks have copied certain digital innovations, such as the freezing of bank cards or access to forgotten Personal Identification Numbers via mobile applications.
Competition in the Mortgage Market
Competition in the mortgage market has intensified leading to falling yields. Increased broker usage has led to lower levels of standard variable rate mortgages which has also reduced yields. Smaller banks and building societies have found it difficult to compete with larger firms in low-risk lending which has led some firms to exit the market while others focus on high-risk lending.
Consumer Credit Yields
The FCA’s overdraft remedy came into force in April 2020 which has led to a decline in unarranged overdraft yields. Covid-19 has also reduced demand for consumer credit. The FCA continues to intervene to protect consumers with temporary support measures such as payment deferral guidance.
Micro-Business Lending
The existing trends of major banks reducing their lending to Small and Medium Sized Enterprises (SMEs) were reversed during the pandemic. However, some smaller banks have taken advantage of the pandemic to grow their share of SME accounts and lending.
Impact on Consumers and Small Businesses
Larger banks are increasingly adopting digital innovation in PCA banking to compete with the digital challengers. This has improved outcomes for consumers and small businesses leading to increased mobile banking customer satisfaction.
Implications of the Strategic Review for the FCA
The FCA remains committed to further interventions to increase competition and innovation in retail banking. This includes Open Banking and Open Finance in order to make it easier to share consumer data in a secure and interoperable environment.
The FCA accepts that innovation has risks and new firms can fail. The FCA is committed to ensuring an appropriate balance between supporting innovative firms whilst also making sure that firm exit is orderly and does not create concerns about consumer protection.
The FCA continues to work on ensuring fair treatment for consumers. The FCA Is currently consulting on a new Consumer Duty and has published Guidance on the protection of vulnerable consumers.
The FCA is also monitoring how banks are implementing new business models and supervising retail bank activity that may affect consumers.
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