A new era for retail banking?

12 June 2017

With banks still processing the Competition and Markets Authority’s (CMA) Retail Banking Market Investigation last year, the Financial Conduct Authority (FCA) announced its own strategic review of the sector in its Business Plan for 2017/2018, published on 18 April 2017. The FCA gave further details on the review in an update on 11 May 2017. The review will cover retail banks, building societies and credit unions, although banks can expect the most scrutiny.

The FCA wants to delve into firms’ business models, looking at the profitability of different product types and parts of the value chain, and how they relate to each other. For example, banks may provide products and services below cost, such as ‘free if in credit’ personal current accounts and free travel insurance, which may be ‘paid for’ by revenue from conditional charges (e.g. default, cash withdrawal and foreign exchange fees). What the review reveals about these practices could have far-reaching consequences for the industry.

Is this a good time for such a fundamental review? Is there ever a good time? Does the regulator care whether now is a good time for the industry? The FCA acknowledges market changes in the retail banking sector and the challenges these bring, but far from suggesting a breather, it wants to know how the industry is responding.

The review comprises two phases. First, the FCA plans to take a deep dive into existing retail banking business models and the economic markets they serve to look at the effect of cross-subsidisation, incentives and how profits drive the business. During phase two, it intends to evaluate the impact of economic, technological, social and regulatory factors on retail banking business models. The regulator is looking for aspects of firms’ business models that may have a negative impact on customers. For example, it expects banks to respond to the FinTech revolution and the growing demand for new digital services without negatively impacting customers dependent on traditional banking services.

Banks may be forgiven for asking, ‘Another review? Didn’t we just do this?’ While it’s true the CMA conducted a retail banking market investigation recently, the FCA stresses that its review is ‘fundamentally different’, because it’s broader in scope. Many banks are still dealing with the recommendations arising from the CMA’s review while also juggling the implementation of MiFID II, the revised Payment Services Directive (PSD2), the new General Data Protection Regulation (GDPR) and the Capital Requirements Directive IV (CRD IV)- the list goes on, and let’s not forget Brexit. The Prudential Regulation Authority’s (PRA) letter to CEOs on 7 April 2017 made it clear that regulators expect firms to be planning for life after Brexit. With all this going on, the regulatory pressures on today’s retail banks remain significant.

 How should firms respond?

Initially, firms need to prepare for the FCA’s data request that will precede the review. Even this seemingly innocuous first stage is likely to be challenging for firms, unless they have data on profitability by business line and product readily available. The second phase may bring more direct engagement from the FCA as the regulator seeks to understand the details of firms’ business models. In the longer term, banks will need to consider fundamental questions about the review’s impact on their business models and product offerings.

Looking ahead

A post-review retail banking world could look vastly different to today. The FCA showed with its recent Credit Card Market Study that it’s not opposed to cross-subsidisation if the market remains competitive. But excess profit from one business area gained at the expense of banks’ more vulnerable customers will raise alarm bells at the regulator and could see the end of cross-subsidisation. Coupled with restructuring and ring-fencing requirements, this scrutiny could result in cost pressures forcing banks to rethink their product portfolios and pricing strategies.

As a result, banks may withdraw less profitable products, but they will need to consider how doing so would sit alongside other strands of the FCA’s Business Plan, such as treating existing customers fairly. Ultimately, the most significant change could be the end of the traditional model of ‘free-if-in-credit’ banking. Banks applying a monthly charge for operating a bank account could become the norm. If so, firms may need to offer more attractive and appropriate packaged bank accounts to remain competitive, and ensure these products offer value for money and are fully transparent to customers from a cost perspective.

It seems change lies ahead for both banks and their customers – and it’s important that firms engage fully with this review from the start to avoid being left behind the competition.

Laura Cox | Partner
Profile | Email | +44 (0)20 7212 1579
Follow @LauraCoxPwC

Megan Charles | Manager
Profile | Email | +44 (0)20 7804 0904

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