Limited Appeal for New Banks in the UK
Potential entrants have new opportunities to capitalize on the redrawn UK retail banking landscape. Scale is not everything. The economics of banking compelled retail banks to lower costs in the decade that preceded the banking crisis. This was often done through greater scale and efficiency. Margin compression was partly addressed by the big incumbents who drove increasing transactions through their systems and crossed-selling products.
It was extremely difficult to launch a new bank business in this environment. Today’s new banking entrants tend to be those who are attached to other financial institutions like Egg or Standard Life Bank or foreign players. This includes Santander through acquisitions and ING Direct via its successful online deposit-gathering operation.
Because core retail banking products come with higher margins, it has made it possible for smaller players to gain a foothold on the market and write profitable business.
Politics
The political climate favors the new entrants. All parties have stated that they want to see more competition within UK retail banking. They have also pledged to support the establishment of new competitors. The new energy is not only driven by political considerations, but also by the need to meet the credit needs of businesses and households. As the EU wants more competition in the UK’s bank market, it has demanded recently that RBS/LBG sell assets to pay for state aid.
Both the Bank of England and the Regulators would welcome more competition in the banking system. However, this positive outlook may be temper by the need to look at new applications at the operational level.
The role of the new regulator is crucial to the entry process into the UK banking market.
There are new differentiators
Newcomers have the opportunity to be different from their competitors through misselling and financial disaster. For those who want to get into the UK banking market, a fresh approach to product and service is essential.
No post-crisis hangover
Even the most powerful banks in the country have faced many challenges over the years and are now occupied with reshaping their balance sheets and monitoring them. The sector is also subject to significant corporate restructuring and government intervention.
These diversions are removed from start-ups so they can focus on building their business and offering credit in a post-crisis environment. This will allow them to handle the aftermath of the crisis. The aftermath of the financial crisis, along with negative public perceptions and sometimes unwieldy legacy system, has made it difficult for banks to provide credit for newcomers. There will be significant obstacles for new entrants, including the “challenge sessions”, which the regulator introduced for new license applications.
Technological blips
Technology is more advanced than it was five years ago, but not as good as it used to be. Many business cases are ruined by high fixed costs associated with managing complex products such as current accounts or mortgages. A potential new entrant does not have the option to buy an existing bank in order to obtain the technology platforms it needs.
You can find a service through a third-party provider.
Purchase a platform to self-implementation from a platform vendor.
Each route comes with its own challenges, as the UK market for platforms that can support UK banking regulations and practices is still emerging. This is especially true for current accounts systems, which will be an integral part of most organisations looking to enter UK retail banking.
Challenges for the Challengers
New banks will face the greatest challenge in finding the right people with the right experience to run the bank and convincing regulators of their competence. The boardroom will be filled with status-driven CEOs. These specialists and risk takers will “support” them in their CEO roles. This will undoubtedly cripple new banks even though the rest of their business model is viable.
Compliance Consultant is one of the UK’s most flexible Regulatory Consultancies. We provide fast and responsive solutions to the financial services sector. We have the expertise and experience to help you solve your problems today, with qualified staff that range from complaints handlers to Chartered Fellows at city of London institutions.