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Despite the financial impact of the pandemic, greater competition in retail banking has been able to spearhead choice while lowering prices for consumers and small businesses, the UK’s banking watchdog says.
Although the UK’s largest banks maintain a dominant position, they are facing greater competition, in particular for personal current accounts (PCA), the Financial Conduct Authority (FCA) has said.
The findings were unveiled in an update to the FCA’s 2018 strategic review of retail banking.
“Competitive pressures and innovation are starting to deliver for retail banking customers, with greater choice, lower prices and more convenient ways to bank,” said Katie Collyer, chief economist at the FCA.
Yet, she also warned that changes that may benefit many of us can also be a risk to those in vulnerable circumstances, noting the guidance that has been put in place on the closure of branches and ATMs, as well as the new Consumer Duty.
First brick in the City wall?
There are signs that some of the historic advantages of large banks may be starting to weaken through innovation, 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 funding costs due to rates on customer deposits already very low.
The banking segment with the most to gain from this has been the digital challengers, such as Monzo and Starling, the data shows.
For example, although the UK’s four largest banks (Lloyds Banking Group, NatWest, HSBC and Barclays) have seen a decline in their collective market share from 68 percent to 64 percent, digital challengers have seen an increase from 1 percent to 8 percent.
In addition to gaining share at the expense of the big four banks, they have also been able to swipe customers from what the FCA describes as scale challenger banks, such as Santander. The market share for all banks in this segment over the last four years has gone from 26 to 24 percent.
The FCA believes that there has been progress in being able to woo consumers, noting that low consumer engagement in banking has historically meant that new market players find it much more difficult to not only enter the market but to expand as well.
Promisingly for challengers, given the relatively low wriggle room in terms of price, the latest data from Pay.UK shows that a majority of consumers switching accounts were doing so for reasons other than financial incentives.
Factors such as online banking facilities, good customer service and ease of mobile or app-based banking systems were cited reasons for switching. According to latest quarterly data, Starling and Monzo were both in the top five retail banks in terms of net gains from customers switching.
Despite this, these digital banks still face an uphill climb becoming the main PCA for their customers.
Relative to the major banks, a smaller proportion of the digital challengers’ PCAs are main accounts.
According to data sourced by the FCA, around 25 percent of the digital challengers’ accounts are thought to be main accounts compared with around 55 percent for the broader market.
This results in lower balances, lower volumes of transactions and lower overdraft usage, which means less funding benefits and less scope to generate fee income.
The FCA believes that this may gradually change as time goes on. “If recent trends continue, we would expect to see consumers steadily increasing use of their digital bank accounts as they gain familiarity,” the report suggests.
Both Starling and Monzo have seen increasing average balances per account. In its second-quarter 2021 trading update, Starling reported average balances of £2,000 per account, which is double the previous year.
In comparison to digital challengers, mid-tier banks such as Metro have been less successful in breaking the monopoly of the four largest institutions. Since 2018, they have failed to increase their market share from 4 percent for PCAs, although they have maintained a comparatively strong 7 percent share of the micro-business current accounts market.
Despite little movement in terms of market share, customer satisfaction remains strong for some of these banks.
Metro, for example, had the highest Competition and Markets Authority customer satisfaction score for branch-based service, according to the report.
“Given that some consumers value the ability to visit a bank branch, as part of a multi-channel service offering, this diversity in business models is welcome from a competition point of view,” the report says.
