Challenger Banks

On Friday, Ed Miliband, the Labour Leader, announced his party’s proposal to create greater competition in the high street with two new  “challenger banks”. The market is dominated by the top 5 banks – Lloyds, Royal Bank of Scotland, Barclays, HSBC and Santander. They control roughly 85% of all current accounts.

The opposition leader outlined Labour’s plans to use the Competition and Markets Authority (CMA) to investigate high street banking and recommend regulatory changes to bolster competition in the market.The Competition and Markets Authority, is due to take over the roles of the Competition Commission and Office of Fair Trading from April 2014. The changes Milliband is suggesting would limit market share and enforce branch closures.

Despite a current lack of confidence and transparency in the banking system the UK’s main business lobby, Confederation of British Industry (CBI), view the imposition of arbitrary caps on market share as too simplistic, with politicians dictating market structure. Further comment by the Bank of England Governor, Mark Carney, may have dealt another blow to the Labour proposals when he said “Just breaking up an institution doesn’t necessarily create a more intensive competitive structure.”

Twice in recent years UK banks have narrowly missed a full competition enquiry. The 2011 Vickers Commission and last year’s cross-party Parliamentary Commission on Banking Standards both stopped short of recommending the move. There is evidence of new entrants to high street banking without policy change and CBI’s Chief Policy Director, Katja Hall, argues they are making an impact on the market without the need for artificially carving up existing branches.. This mini-revolution among new banking entrants has largely succeeded due to a shift in the competitive playing field of the internet. A whole new banking interface has opened up using on-line tools to reach the mass market, offering convenience and transparency.

Back on the high street there is still an appetite for traditional face-to-face banking and there are also new movers. The most notable of these would be Metro Bank, which opened its first store in Holborn, London, in 2010. This was the first new high street bank in over 100 years and it has now built up a network of 25 branches in the South East. A report from Reuters on the 19th January says:

(Reuters) – New British lender Metro Bank has raised 387.5 million pounds ($637.2 million) to fund its expansion plans by selling stock to institutional and private investors, it said on Sunday.

and further on in the same report:

Metro promised to shake up the country’s banking industry and now has 25 branches in and around London. It is loss-making and wants to have 200 branches by 2020.

Richard Branson also established Virgin Money when he obtained a banking licence by purchasing a regional bank, Church House Trust in 2010. Two years later he bought 75 branches from Northern Rock creating a high street foothold.

More recently, the Post Office, with an unparalleled network of over 11,500 branches across the UK, has moved to extend its presence in the current account market. Following on from a pilot scheme available at 29 branches in East Anglia, services are being rolled out to another 81 branches in the East Midlands and the East of England. In partnership with the Bank of Ireland they are a serious alternative to the major UK banks with a large established customer base and ease of access in their favour.

Regulators have worked to ease the process for new entrants to banking by cutting away some of the red tape. The start-up capital requirements have been lowered and the timetable for authorisation has been accelerated. One major problem remains: access to an independent money transfer system. New banks can only access the transfer systems through one of the existing high street lenders so are totally beholden on what the established banks are willing to offer.

Further encouraging signs for high street banking competitiveness is the 7 day switching system being initiated by the Payments Council. For the UK’s 49 million current account holders it should herald a new era of banking choice with a guarantee for the customer to “ditch and switch” their current account provider within 7 days. The new bank will be responsible for all existing payments being moved over with the account.

These changes may herald new opportunities for finance and IT professionals.

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