Posted: 9th July 2018


On the 27th June 2018, the Financial Conduct Authority (FCA)  published an update on its ‘wide-ranging review of the retail banking sector’ . The review is an in-depth study of retail banking business models, undertaken to give the FCA a greater understanding of the changes, and impacts of those changes which banks may face in the future. As part of this, the FCA analysed sources of competitive advantage that may have helped major banks gain their market share.

The review also looks at the potential impacts of technological and regulatory changes, such as Open Banking and PSD2, on how traditional personal current accounts are paid for going forwards. The FCA collected information from 45 firms across the market to inform the review, including major banks, small retail banks, building societies, specialist lenders and new digital banks.

Andrew Bailey, FCA chief executive said;

This is an important piece of work to help us understand the complexities of the retail banking market and how this may develop in the future.

“It provides more evidence that there is no such thing as free banking. In particular, this evidence will inform the work we are doing on overdrafts, so we can fully understand the potential effects of the significant action we are considering taking in this market.”

Key Findings

The FCA found that current account holders with major banks who open savings accounts with that same provider typically earn between 30% to 50% less interest than if they switched to a ‘challenger’ bank. It was also found that current account customers tend to go, automatically, to their provider to buy other banking products, rather than shopping around:

  • 52% of personal current account (PCA) customers with credit cards have one through their PCA provider
  • 48% of PCA customers with personal loans have one through their PCA provider
  • 32% of PCA customers with mortgages have one through their PCA provider

Distribution of PCA contribution between different consumer types

Banks currently generate a positive profit contribution from the majority of PCA customers, via overdraft charges and the funding benefit they derive from the balances.

A small percentage of customers pay much more than others. Around 10% of customers generate between one third and half of the contributions from PCAs. The FCA intends to refine their understanding of costs to serve different types of customers as a next step in their analysis.

The majority of unarranged overdraft charges are placed on less than 2% of PCA consumers. The FCA has expressed concerns that vulnerable customers are more likely to be charged for unarranged overdrafts. This has also been highlighted as an area of focus in the FCA’s work on high cost credit.

Customer base

The FCA wants to increase their understanding of the nature and behaviour of customers of different categories so they can understand the impacts of potential changes to business models. They seek to discover which customers are more or less likely to switch product or provider in response to Open Banking and what impacts this would have on business models.

They also want to look at the impact of cross-holdings (holding different retail banking products with the same bank) and understand to what extent firms profit on products when lending to PCA customers. PCA providers are generally better informed on their financial position which leads to better decisions. Because of this, they could potentially profit more from their lending decisions.

Cost of retail banking

The FCA will increase their understanding of differences in costs of servicing equivalent customers across various categories and firms. By doing this, they hope to be able to better predict how business models may change. The FCA poses the question, in a scenario of intensified competition, could larger firms respond by reducing costs and how would this affect end consumers? In scenarios involving reduced PCA income, what is the likelihood of new charges being introduced for PCAs or services being scaled back?

Previous studies have not examined costs of retail banking in depth, so the regulator will require banks to provide data for this exercise.

Next steps

The regulator will continue to develop and explore the important questions raised in the study and are actively looking to engage further with market participants to understand their views on the analysis set out in the update.

The regulator would like submissions in response to the update, including evidence or views on any emerging thinking in the update or views on areas of focus for the next stage of the review. They will be engaging directly with banks to discuss these points but would also like to hear from stakeholders.

The FCA will engage with firms to find effective and proportionate ways to explore these questions.

The deadline for comments on the progress report is 7 September 2018.

Considerations for firms

At this stage in the study, firms should consider the early findings of the report and understand how their firm is currently positioned. The changes to regulations on the horizon which are likely to impact incumbents and challengers should be noted. The likelihood of increased competition following the implementation of Open Banking will have a knock-on effect on the traditional retail banking model, with the ‘big switch’ cited in the report being of greatest concern to incumbents.

Firms should actively look to review their current operating model in line with PSD2 and Open Banking to ensure they have a fit for purpose and sustainable for the longer term.

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