The studies and interventions aimed at strengthening competition in UK Retail Banking have been numerous and the impact low. Although several challenger banks have emerged, often with innovative propositions, they have made limited progress. Back in 2018, it was not clear how big a competitive advantage the incumbents enjoyed, what it came from, what role regulation played and whether retail and small business customers were winners or losers.
In 2018, Jonathan was leading retail banking supervision at the FCA. Bringing his expertise and experience with business model strategy from 20+ years with McKinsey and as an executive in financial services, Jonathan initiated and co-led the Review of Retail Banking Business Models. The objective was to unpack the components of the competitive advantage enjoyed by the various archetypes of competitors.
The results signposted much that could be done to remove regulatory barriers to growth and to improve the outcomes for consumers.
The work concluded that the competitive advantages of the larger retail banks gave them a pro-forma pre-tax return on equity of 28% versus the smaller retail banks and building societies with 6% and 11% respectively. While some of this advantage came from economies of scale in Opex costs, the bulk of the advantage came from regulatory challenges, higher fee income (e.g., from overdraft charges) and lower cost of funding from the free if in credit balances and lower interest rates paid on savings. Since then some of these challenges have been (partially) addressed.
It wasn’t until 2025 that the PRA increased the threshold for requiring mid-size banks to issue additional and expensive capital (MREL), but other very significant prudential challenges remain. For example, the smaller banks must still use a standardised model for determining their regulatory capital requirements which puts them at a substantial disadvantage to large banks which get to use their own models which indicate much lower capital requirements to back equivalent business.
It wasn’t until 2023 that the FCA intervened in the market for cash savings to outline a 14 point plan to drive greater fairness in the rates paid on cash savings balances. The advantage of the large banks’ huge share of current accounts and the balances in them for which they pay no interest is only slowly being eroded by competition in the current account market.
However, despite these examples of addressing some of these challenges, progress has been slow and several mid-size banks have not been able to meet the challenges and have succumbed to consolidation. More could be done since challenger banks play an important role in supporting the growth of small businesses, financial inclusion, and the improvement in value for money and service to retail customers.