Strategic review of retail banking business models

Read 2022 Final report (PDF)

Read 2022 Annex reports (PDF)

Read 2018 Final report (PDF)

Read 2018 Annex reports (PDF) 

The Retail banking sector performs a vital role in the economy. There are around 100 million current accounts (PCAs) and 5.6 million microbusiness accounts in the UK, and retail deposits total around £1.5 trillion. Retail lending is a key driver of economic activity; UK households owe around £1.6 trillion in mortgages and £198 billion in consumer credit.

The accelerating pace of change from regulatory changes and technological developments brings unprecedented potential to transform retail banking.

The pandemic has accelerated the move to digital channels, had profound effects on consumers and business finances and increased financial pressures on some banks. In our 2022 Final Report, we have sought to understand the impact of these and other potential changes. 

Objectives of review

To understand the impact of change on retail banking business models, and the implications for consumers, we launched exploratory work in April 2017. Our objectives, as set out in our Purpose and Scope paper were to:

• understand retail banking business models in greater depth by looking at the business models of firms to identify any potential conduct or competition issues
• understand how free-if-in-credit banking is paid for, in particular whether it leads to any distributional concerns between different types of consumers
• understand the impact of changes such as increased use of digital channels and reduced branch usage on business models and consider potential consequences for our consumer protection and competition objectives

2018 Progress Report

In June 2018, we published a Progress Report. This noted that historically the market shares of the major banks have been high and stable, and that the PCA and branch network had been a key competitive advantage. 

2018 Final Report

Our 2018 Final Report extended this analysis beyond the PCA and informed our view of emerging scenarios in retail banking and their impact on consumers. We also examined the impact of branch closures, provided an update on our distributional analysis of PCAs, and analysed the profile of customers who switch PCA provider.

Our 2018 Final Report confirmed our view that the PCA is an important source of competitive advantage for major banks.

Major banks also benefit from advantages in lending activities, where they generate higher yields and enjoy relatively low levels of capital requirements. These advantages have led to little or no interest on credit balances, high charges, and pricing models that can work against loyal customers.

Additionally, banks are closing branches in response to declining usage and people are having to travel further to reach branches.

Innovative business models and competition could deliver better value and enhanced customer service.

2022 Final Report

Our recent analysis updates our 2018 Final Report, allowing us to explore developments since 2015. We have explored trends in the retail banking industry in light of significant changes such as Covid-19, increased digitalisation and ring-fencing and considered what this has meant for competition and overall profitability. 

We also provide a detailed analysis of different products within the retail banking business model, namely PCAs, mortgages, consumer credit and SME products. Our key findings are:

• Large banks are in a strong position but face increasing competition, in particular for PCAs.
• Low levels of consumer engagement have historically contributed to high barriers to entry and expansion. Digital challengers have rapidly gained share in the PCA and BCA markets. 
• Competition in the mortgage market has intensified, which has caused yields to come down. 
• Yields on consumer credit have also fallen, particularly on unarranged overdrafts
• Large banks did proportionately more micro-business lending under the government schemes than most other banks. 
• Increased competition and innovation have improved outcomes for some consumers and small businesses but others, particularly consumers with heavy branch usage or lower balances, may have had worse outcomes.

Next steps

Our work on retail banking business models supports the development of our strategy across a range of priorities and gives us a data-led evidence-base upon which to carry out further investigations.

Based on our 2018 analysis, we made substantial changes to the way in which consumers pay for higher-cost credit, particularly for unarranged overdrafts. We have looked at the ways firms earn revenue from payments, in collaboration with the Payment Systems Regulator (PSR), and continued to monitor changes in retail banking business models. We also explored further the prices microbusinesses pay for business banking services.

The 2022 Final Report further highlights the organisational-wide priorities where our strategic review can inform further work.

We will be discussing the points raised in our 2022 Final Report with firms and consumer organisations but are keen to hear from other stakeholders. Please send written submissions to [email protected] by March 31st 2022.