Who are you calling a challenger? Competition is alive and kicking in UK Banking
13 March 2017
By John Lyons
Competition in UK banking is alive and kicking after decades of consolidation: no fewer than 19 new banking licenses have been awarded since 2010, with a further eight pending.
Our interviews with more than 25 banking CEOs who operate in the ‘challenger segment’ – as well as a survey of more than 2,000 consumers – set out to understand in detail what their organisations have to offer, and to identify the barriers standing in their way.
Our research identifies four key themes:
1. There is no such thing as a challenger bank
CEOs find the term “challenger” misleading for several reasons. Not least, many do not believe their organisations are seeking to challenge the biggest banks: rather than seeking to take market share in core propositions such as current accounts, their goal is to supply specific products and services to carefully targeted segments, including under-served parts of the market. PwC’s research suggests this is realistic: more than one in two consumers (54%) say they are happy to source such products from multiple providers if that’s what it takes to get the best deal on each one.
In any case the so-called challengers’ competitors will very often include businesses from other parts of the financial sector – or non-financial players leveraging their technology expertise to move into banking.
The concept of a challenger bank also suggests this is a homogenous group battling the same challenges and pursuing the same opportunities. That is to over-simplify. In practice, PwC’s research identifies four separate groups of banks in addition to the largest players: digital-only banks built on innovative technology platforms; specialist banks targeting very specific market segments; mid-sized full-service banks with well-known brands and branch networks; and non-bank brands with parent companies that are strong in other industries. Each of these categories has its own challenges and opportunities.
2. Many banks still find regulation disproportionate and challenging
Although regulatory efforts have been made to support competition in the banking sector many CEOs still cite tough hurdles standing in their way. In particular, the different capital requirements applied to banks categorised as internal-ratings based banks and standardised approach banks are seen as creating an uneven playing field. The Prudential Regulation Authority (PRA) is just beginning to respond to these concerns, but in many areas, the requirements for Internal Ratings-Based (IRB) banks, which include all of the UK’s largest players, are less exacting than those that apply to (Standardised Approach) SA banks, including almost all of the smaller businesses.
Other issues are problematic too. Some CEOs complain about the difficulty and expense of accessing the UK’s payments systems. Others argue that regulation designed for the biggest bank is applied to smaller players with no adjustment for their size. And CEOs also say there aren’t enough mechanisms to ensure financial products are transparent and comparable.
3. Open Banking is set to create a vibrant and modularised market
CEOs see the Open Banking initiative as having huge potential to enhance competition and transform the banking experience, as banks are able to access and aggregate consumer data held by other institutions. This will help consumers manage their money across multiple accounts, choosing the products and services that suit them best from a suite of providers.
Some providers will choose to compete in relatively narrow areas, while for others a business model based on integrating such offerings will be more appropriate. New partnerships will flourish against this backdrop, but CEOs also see Open Banking as likely to herald the incursion of larger technology organisations into their territory.
4. Each segment faces its own issues
Just as the so-called ‘challengers’ are far from being a homogenous group, so each segment of the marketplace faces distinct strategic choices and challenges. For example, while the problem facing many mid-sized banks is the need to differentiate their propositions, for digital-only banks, customer awareness is a pressing concern.
In practice, all banks will need to embrace new digital models, while simultaneously making the right strategic choices for their businesses – which customer segments to target and how to differentiate their propositions.
Overall, our research suggests the outlook for UK banking is exciting with an accelerating trend towards a more modularised, diverse and innovative banking market. At our recent event discussing the report it was very clear the focus for all banks was how these changes can better enhance the customer experiences and services that are provided. We expect the consolidation of the past 50 years to reverse: while not every new player will succeed, there is room in the market for many different banks and non-banks to succeed.