FCA review finds competition is growing in retail banking

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FCA review finds competition is growing in retail banking

The City watchdog found evidence that growing competition has seen a shift from large banks to small businesses, despite the financial impact of the pandemic.

In an update to its 2018 strategic review of retail banking, the FCA found signs that large banks’ historic advantages were starting to weaken, driven by digital innovation and changing consumer behaviour. 

The economic environment – in particular sustained low interest rates – had constrained banks’ financial returns but large banks were in a strong position though facing increasing competition, in particular for personal current accounts, it said. 

The share of personal and micro-business current accounts held by digital challengers rose between 2020 and 2021, while the largest banks saw their share fall. This trend occurred even as large lenders lent proportionately more to micro-businesses during the pandemic.  

The FCA said 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 banks' reduced ability to lower fundings costs.

It said evidence suggested that intense competition, partly driven by the increased use of brokers, had benefited mortgage borrowers through lower interest rates, though these made it more difficult for smaller lenders to compete. 

The regulator said banks were transforming their businesses to meet the challenges of digitalisation and the pandemic had accelerated the move to digital channels.

Kate Collyer, chief economist at the FCA, said: “Competitive pressures and innovation are starting to deliver for retail banking customers, with greater choice, lower prices and more convenient ways to bank. 

“But changes that may benefit many of us can also be a risk to those in vulnerable circumstances, which is why we have put in place guidance on the closure of branches and ATMs.

"We are also consulting on a new consumer duty to set higher expectations for the standard of care that firms provide.”

She added: “Our research clearly shows the impact of the measures we took to reform the overdraft market and protect those financially affected by Covid.”

The regulator said reforms to the credit market were having an effect, with lenders’ yield – a measure of financial return – for unarranged overdrafts falling sharply in response. 

Measures put in place by the FCA to support borrowers financially affected by the pandemic had also resulted in a drop in yield on authorised overdrafts.

Digital innovations by banks and their customers, accelerated by the pandemic, had improved service quality and satisfaction, particularly for mobile and app-based users. 

Further improvements through innovation were likely to come as initiatives, that allow the sharing of consumer data, fall into place.

John Wilson, UK managing director at banking software company Avaloq, said: “The FCA’s review of retail banking demonstrates that digital innovation is not just a nice-to-have for UK consumers, but vital to quality of service, accessibility and competitiveness in the sector.

“It’s encouraging that technology has played such an influential role in fostering a more competitive operating environment, and we expect the pace of digital innovation accelerated by the pandemic to become the new normal for the UK retail banking sector.”  

sonia.rach@ft.com

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