Breaking the “Barriers to Growth”

14 August 2019

Since its inception in 2013 the PRA and FCA’s New Banks Unit has made great progress in reducing barriers to entry for new banks in the UK. But while there is clearly an increased number of banking competitors in the market today, “no small bank has successfully become a large bank”. Since Sam Woods, CEO of the PRA, made this observation in his speech on competition in January, the PRA’s Business Plan for 2019/20 has gone on to highlight “barriers to growth” as a new area of focus for the regulators for the coming year.


So what are the barriers to growth and what can we do to break through them? And what do we mean by growth in the first place? Not every new bank is looking to grow balance sheet or customers, instead choosing to focus on returns. From my experience of working with new bank start ups and the small to mid tier UK banks here’s a few potential barriers to growth that are front of mind.

  1. Brand and reputation. Perhaps the most obvious and difficult to overcome. The high street banks are well known and are generally seen as secure. Thus they have cheaper, “stickier” funding and find it easy to gather wholesale deposits unlike their newer counterparts who hit the best buy tables for “un-sticky” internet deposits and are less likely to be an approved counterparty for wholesale deposits. This means the incumbents can price their prime residential lending more competitively, forcing smaller banks to find business amongst niche markets which often carries increased risk and consequently increased regulatory scrutiny. The good news is the banks can take control of this issue and actively build their brand and reputation.
  2. Secondary banking. Most challenger banks are not seen as a primary bank, partly owing to brand and reputation (point 1 above) but also because current accounts are difficult to break into from a regulatory perspective. There are operational resilience and OCIR implications to providing current accounts, plus the increased capital requirements imposed by MREL are beyond the appetite for most challenger banks. As a result many of the small banks do not offer current accounts and consequently are not the primary banking providers for their customer base which limits growth and keeps the cost of funding high. This one is perhaps more difficult to overcome with the hurdles being regulatory in nature, but there is some proportionality built into the regs that firms could take advantage of to get on the ladder.
  3. Management stretch. The bigger you are the more people there are to spread the workload across. This is true for all areas but let’s take regulation as an example. Regulatory supervision is intense as a new player, which takes time and resource without a big team to manage it. Plus regulatory change for the most part impacts all firms, regardless of size, albeit with differing “proportionate” expectations. Where larger firms have teams to deal with the constant regulatory change and know the expectations are full, complete adoption, management of smaller banks are left running these projects around the day job without a clear view of what is proportionate for them due to a lack of peer and regulatory familiarity.
  4. Technology. This is an interesting double edged sword for the newer banks, many of whom have newer, more flexible systems on which to build than the incumbents running with multiple legacy systems. The newer banks also more frequently have digital customer interfaces which are popular with consumers which links in with the point on brand above (point 1). The difficulty comes from either i) developing and managing your own technology in house as experienced by some; and ii) managing the multiple outsourced and third party service providers that underpin the operating platform. This is an area of increased regulatory scrutiny too and links back in with the point around management stretch above (point 3). There is clearly work for both banks and regulators to do in developing best practises for managing technology in a banking environment.
  5. Risk management capabilities and maturation. There are a number of regulatory policies that can only be applied to firms which have a well developed risk management function. For example, the Pillar 2A IRB ranges and off setting within Pillar 2A are all linked to risk management capabilities. But it is difficult to demonstrate maturation of the risk management framework when you are yet to weather an economic crisis and this is becoming an area of increased regulatory focus following the “Fastest Growing Firms” thematic from the PRA (see my blog on that here). Of course risk management is also an area of management stretch (see 3 above) which impacts the cost base.

There are undoubtedly many more barriers to growth but there’s also a lot we can do to tackle them. We are keen to hear from those in the new and fast growing banking markets what they see as the barriers and how we could combat these in future. If you would be interested in joining the debate, please email Stephanie Henderson-Begg to sign up for our New Banks Forum Round Table from 2pm on 20 September.

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