Banking competition is growing

21st January 2022

The Financial Conduct Authority (FCA) says competition in retail banking is growing, with a shift from large banks to small businesses.

In an update to its 2018 strategic review of retail banking, the FCA says the increase in competition is providing more choice and lower prices for consumers. The analysis shows that the share of personal and micro-business current accounts held by digital challengers rose between 2020 and 2021, while the gap in profitability between large banks and smaller challengers has reduced in recent years, with this driven by competition in mortgage prices, innovations in banking services and banks’ reduced ability to lower costs.

Digital challengers including Starling Bank and Monzo have increased their share of the personal current account market from 1% in 2018 to 8% in 2021. The share of personal accounts run by the Big Four of Barclays, HSBC, Lloyds and NatWest fell from 68% to 64%, while their share of small business accounts fell from 74% to 67%.

The analysis shows that scale challengers, including the likes of Santander, Nationwide and Virgin Money, saw market share in personal accounts slip 26% to 24%, with their business account share falling from 18% to 16%. The FCA report suggests innovation has loosened the biggest banks’ grip on the market, saying: “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.”

Evidence suggests that intense competition, partly driven by the increased use of brokers, has benefited mortgage borrowers through lower interest rates, though these make it more difficult for smaller lenders to compete.

FCA reforms to the credit market are also 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 also resulted in a drop in yield on authorised overdrafts.

Adoption of digital innovations by banks and their customers, accelerated by the pandemic, has also improved service quality and satisfaction, particularly for mobile and app-based users. Further improvements through innovation are likely to be enabled by initiatives that allow the sharing of consumer data in secure and convenient ways.

Kate Collyer, Chief Economist at the Financial Conduct Authority, 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.”

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

Sarah Coles, Senior Personal Finance Analyst at Hargreaves Lansdown said “High street banks are losing their vice-like grip on the UK’s current accounts. Almost one in ten accounts are now held with a digital bank – up from 1 in 100 just four years ago. This is great news for those customers who are able to get a better deal, and are encouraged to look elsewhere for mortgages and savings too. However, it has been a real blow for those who rely on bank branches.”

“As the high street giants have closed branches and moved online, they’ve lost the things that gave them an edge over their newer counterparts. At the same time, online banks have been able to offer innovations to set their apps apart, which has accelerated the rise of these banks.”

“Current accounts are vital to how the banks do business. They don’t just make them money – although between 2018 and 2020 a typical current account made the big banks £104 each in charges and fees. They also give them a captive audience for all their other products. Separate HL research shows that 40% of people hold their savings with the same bank as their current account, a third go to their existing bank when they’re planning to open a savings account, and among this group over half don’t even consider anywhere else.”