Addressing capital requirements in UK banking
How regulators will address capital requirements as they seek to promote competition in UK banking.
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A vibrant group of banking businesses is emerging in the UK, often described as ‘challenger banks’. These banks are not any of the recognised main high street banks (RBS, HSBC, Lloyds, Barclays, Santander), but they have received significant attention in recent years, primarily for their means of driving innovation and improving customer service levels in the market.
While this development is potentially exciting, the diversity of these banks is not widely understood. Too often, it is assumed that the ‘challenger banks’ are all cut from the same cloth, and that they face identical market dynamics.
To challenge such misleading assumptions – and to better understand how the opportunities available to these banks can be exploited - PwC has interviewed dozens of CEOs and senior executives from these organisations, while working with YouGov to establish consumers’ views and preferences as the banking industry evolves.
Key findings
Our report documents in detail our research and interviews with the CEOs about this part of the UK retail banking market. For a taster, here are the four key findings:
The term ‘challenger bank’ does not reflect the breadth of these banks’ offerings and varied strategies.
These banks actually consist of four broad groups with different models, aspirations and challenges. Many do not define success in terms of their ability to challenge or rival the large high street banking groups. Rather, their goal is to serve their specific target markets profitably.
“We're happy being customers' second bank. We don't want to be their primary bank and we don't offer current accounts for this reason; current accounts are a dated product.”
While regulatory policy has begun to make it easier for new banks to enter the market, a more level playing field will improve customer choice and outcomes.
The banks we spoke to recognised and appreciated regulatory efforts to open the market to new entrants and foster further competition, for instance through the recent investigation by the Competition and Market’s Authority (CMA) into the retail banking market.
However, they highlighted a number of areas that could accelerate progress:
- reducing the disparity in capital treatment;
- improving regulatory proportionality;
- increasing access to payment systems;
- increasing transparency of products to improve customer understanding of product value.
“Capital (standardised vs. IRB model) is the single biggest issue and dwarfs everything else.”
Open Banking is set to drive a fundamental change in the banking landscape.
As the regulators take action to further develop competition, the future market will be increasingly varied and modular, resulting in a very different banking experience for customers. Open Banking will give rise to new business models: some providers will choose to specialise in narrow areas, while others will compete by making it possible to integrate niche offerings from a number of different companies in a seamless way.
However, the success of any Open Banking strategy will rest on firms' ability to build trust with their customers. Banks and third party providers will need to reassure consumers that they have the appropriate security measures in place to safeguard their data and respect confidentiality.
“If one pillar falls, the others are at risk.”
To be successful, each bank needs to overcome specific (and not insignificant) challenges.
Our consumer survey highlighted significant customer perception issues for most of the groups. Each group also has specific challenges. For example, mid-sized full service banks face pressure to transform their operating models and differentiate their propositions, while digital-only players seek to build awareness with customers and attract them with distinctive service offerings.
“Many challenger banks will get bought within the next five years; I find it difficult to see a future where all the current challenger banks will be successful in the long term […]”
Our report documents the findings of our research in detail: the depth and breadth of the “challenger bank” segment, the regulatory impediments to new entrants’ progress, the promise of technology and the priorities for each category of new player. It is aimed at all stakeholders with an interest or possible role in transforming the UK’s banking industry for the better.
Why there’s no such thing as a challenger bank
The catch-all idea of a challenger bank masks the very significant differences between many of the banks it purports to describe. We see these banks split between four broad groupings with varying target markets and service models:
Examples of challenger banks
Mid-sized full service banks are well-known brands, with single-digit millions of customers and between 2,000 and 9,000 employees. They have been moving to digital channels, but believe that physical presence remains important and serve customers with a physical network of up to 600 branches. Examples: the Co-operative bank, TSB, CYBG.
Specialist banks have propositions typically anchored around specialist lending and saving for customers who they believe are underserved by others in the market, such as certain types of small and medium-sized enterprises and the buy-to-let market. They generally have very limited physical presence, placing more emphasis on call centres, third party distribution channels, some regional offices and increasingly digital channels. Examples: Secure Trust, Aldermore, Shawbrook.
Digital-only banks recognise the megatrend of customers shifting to digital channels and are building their business to serve both digital natives and converts. They pride themselves on innovative technology platforms that promise exceptional customer experience and engagement, primarily through mobile apps. Examples: Starling, Monzo, Tandem.
Non-bank brands have parent companies that are strong players in other industries, such as major supermarket chains. They have strong and trusted brands, and generally seek to serve the needs of customers loyal to the parent group as a whole. Examples: Tesco bank; Sainsbury’s bank, Virgin Money.
Insights
Who are you calling a challenger?
Competition is alive and kicking in UK banking.
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Open Banking will shape the future of UK retail and commercial banking
Our report documents the findings of our research into the ‘challenger segment’ of the UK retail banking industry.
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Contact us
John Lyons
Partner, Advisory, PwC United Kingdom
Tel: +44 (0) 7590 351 933
Email
Darren Meek
Partner, Financial Services, PwC United Kingdom
Tel: +44 (0)20 7212 3739
Email
Martin Roets
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