FCA strategic review of retail banking business models

On January 20, 2022, the Financial Conduct Authority (FCA) issued a strategic review retail banking business models (Strategic review).

The strategic review updated the previous strategic review which was released in 2018 and has 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 retail banking. In fact, the pandemic had accelerated the shift to digital channels and the digital transformation of incumbent banks. This transformational digitization has expanded choice and reduced costs for bank customers, including individuals and small businesses.

In this FinBrief, we summarize the main conclusions of the strategic review.

Growing competition

Big banks such as LBG, Barclays, HSBC and NatWest are increasingly seeing their historical advantages eroded due to innovation, digitalization and changing consumer behavior. The profitability gap between big banks and digital challengers has continued to narrow.

Digital challengers

Traditionally, new entrants to banking suffered from high barriers to growth, which made building market share costly and slow.

Digital challengers now represent 8% of the retail current account (PCA) market. They have been able to attract customers by offering innovative mobile applications that make banking operations easier and more convenient. The 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 lower yields. Increased use of brokers led to lower levels of standard variable rate mortgages, which also reduced yields. Smaller banks and building societies have struggled to compete with larger companies in low-risk lending, leading some companies to exit the market while others focus on high-risk lending.

Consumer Credit Yields

The FCA’s overdraft remedy came into effect in April 2020, resulting in lower yields on unarranged overdrafts. 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 guidelines.

Loans to micro-enterprises

Existing trends of big banks to reduce their lending to small and medium-sized enterprises (SMEs) have reversed during the pandemic. However, some smaller banks have taken advantage of the pandemic to increase their share of SME accounts and loans.

Impact on consumers and small businesses

Large banks are increasingly embracing digital innovation in PCA banking to compete with digital challengers. This has improved outcomes for consumers and small businesses, leading to increased mobile banking customer satisfaction.

Implications of the Strategic Review for FCA

The FCA remains committed to continuing its interventions to increase competition and innovation in retail banking. This includes Open Banking and Open Finance to facilitate the sharing of consumer data in a secure and interoperable environment.

FCA recognizes that innovation is risky and that new ventures can fail. The FCA is committed to ensuring an appropriate balance between supporting innovative companies while ensuring that the company’s exit is orderly and does not create consumer protection concerns.

The FCA continues to work to ensure fair treatment for consumers. FCA is currently consulting on a new Consumer duty and published Advice on the protection of vulnerable consumers.

The FCA also monitors how banks implement new business models and oversees retail banking activities that may affect consumers.

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