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Chapter 1
Financial Conduct Authority
Strategic Review of Retail Banking Business Models – Final Report
resulting from the uncertainty caused by the Covid-19 pandemic. The full impacts will
take time to be fully understood. We will therefore continue to monitor developments
and use our full array of regulatory tools to ensure the markets work as well as possible,
generating good outcomes and fair treatment of consumers.
Summary of Our Key findings
Finding Summary
Large banks are in a strong
position but face increasing
competition, in particular for
Personal Current Accounts (PCAs)
There are signs that some of the historic advantages of large
banks may be starting to weaken through innovation and
digitisation and changing consumer behaviour. The gap in
profitability between large banks and smaller challengers has
reduced in recent years, driven by competition in mortgage
prices, innovations in banking services and reduced ability to lower
fundings costs, with rates on customer deposits already very low.
Low levels of consumer
engagement have historically
contributed to high barriers to
entry and expansion
Building market share has been an expensive and slow process
for traditional challengers, often involving switching incentives
or relatively high interest on balances. Despite this, traditional
challengers have provided additional choice and value for those
consumers that have opened accounts with these challengers.
In contrast, digital challengers
have rapidly gained share in
the PCA and Business Current
Account (BCA) markets
Collectively, digital challengers now have around 8% market share
for PCAs. They have attracted customers in part by offering
innovative mobile apps which make the experience of banking
easier and more convenient and to help consumers manage their
money. Relative to the major banks, a smaller proportion of the
digital challengers’ PCAs are main accounts. This results in lower
balances, lower volumes of transactions, and lower overdraft
usage. These lead to lower funding benefits and less scope to
generate fee income.
Competition in the mortgage
market has intensified, which has
caused yields to come down
In a market with high demand, and following ring-fencing,
competition has intensified leading to falling yields across the
mortgage book. Increased broker usage has led to lower levels of
standard variable rate mortgages, further reducing yields. Smaller
banks and building societies have struggled to compete with
larger firms in the low-risk lending segment. Some have exited
altogether; others have sought yields in other segments, including
higher risk areas of the market.
Yields on consumer credit
have also fallen, particularly on
unarranged overdrafts
Our overdraft remedy came into force in April 2020 and caused a
significant decline in unarranged overdraft yields.
The pandemic has dampened demand for consumer credit
overall as spending fell. We intervened to protect consumers
with temporary support measures such as the payment deferral
guidance.
Large banks did proportionately
more micro-business lending
under the government schemes
than most other banks
Previous trends of reduced lending by major banks to SMEs
reversed during the pandemic. But some smaller banks were
able grow their share of SME accounts and lending during the
pandemic.
Increased competition and
innovation have improved
outcomes for many consumers
and some small businesses
Larger banks have adopted digital innovation in PCA banking – led
by digital challengers – and this has improved service quality for
many consumers.