The future of competition and regulation in retail banking

Speech by Christopher Woolard, Executive Director of Strategy and Competition at the FCA, delivered at Future of Retail Banking 2017.

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Speaker: Christopher Woolard, Executive Director of Strategy and Competition
Location: Future of Retail Banking 2017, London
Delivered on: 28 November 2017


  • Retail banking is on the cusp of some of the most significant change the sector has ever seen in the form of PSD2 and Open Banking.
  • These changes are welcome, as competition has long been a concern in the retail banking industry.
  • As the regulator, we need to understand the impact of these changes on firms’ business models, and how they may affect consumers.
  • PSD2 and Open Banking offer opportunities for incumbents, as well as challengers.

Note: this is the speech as drafted and may differ from delivered version.

Earlier this month, the world watched in amazement as the Atlas robot, billed by its creators as ‘The World's Most Dynamic Humanoid’, performed a series of incredible jumps and backflips.

In amongst the grim prophecies of stunned viewers (including ’The end is near!’), one more hopeful comment captured the spirit of restless progress that has defined recent years: ’I can't wait to see what this thing will be able to do 10 years from now.’

The next few years will bring about a series of changes that have the potential to overtake all others that came before.

We are living through an age where technology and innovation are surging forward at a staggering pace.

Where Atlas looked somewhat awkward and jerky in previous tests, it is now performing feats of gymnastics that most humans would struggle with. And in ten years’ time, it may be saving lives in disaster zones.

While those of us engaged in financial services have not been completely immune to changes driven by advanced technology, in retail banking - the front line of the financial sector and for many consumers their only interaction with it - things have stayed surprisingly fixed. In essence the same service with some technology on top. 

This may not be the case for much longer.

The next few years will bring about a series of changes that have the potential to overtake all others that came before.

Today I’d like to talk about two of these in particular: PSD2 and Open Banking. For the first time in the retail space, big data and financial services really can come together where the customer has choice.

I’ll also touch on what we as a regulator are doing to understand the new frontier which is opening up before us, and our thoughts on what might come next.

The new horizon

As I’m sure everyone in this room is aware, on 13 January next year the second Payment Services Directive, or PSD2, will come into effect.

Meanwhile, Open Banking will shortly go live, helping to make PSD2 a reality in the UK.

The aims behind these initiatives are threefold.

The first is enhanced consumer protection.

Cyber-crime is big news and big business. The National Crime Agency estimates that the cost of cybercrime to the UK economy is billions of pounds per year – and growing. Today, even household items can be turned against us, as ‘the internet of things’ creates new opportunities for hackers.

It’s also a beast whose tentacles reach right across the globe. Customers who were affected by the Tesco Bank hack last year reported that their money was moved to companies in Brazil and Spain, prompting speculation that the theft was organised by a gang with global operations. So when it comes to cyber and issues like Anti-Money Laundering (AML) controls, we are deeply sensitive to the risks.

Against this backdrop, Open Banking and PSD2 offer protections that offer the potential to make us more secure.

This might sound counterintuitive – you’d assume that with more people conducting business online and sharing their data that security would be compromised, but the advent of Open Banking and PSD2 will actually trigger a number of improvements.

One clear example of this is Strong Customer Authentication, which requires two forms of ID from users to access their payment accounts online. This could be a password (‘something you know’), a mobile phone (‘something you have’) or even a fingerprint (‘something you are’).

The second thing PSD2 and Open Banking are trying to achieve is new and more convenient ways for consumers to manage their finances.

We’ve already had a taste of the sort of businesses that might thrive: from sites that help you compare financial products – and even make the switch on your behalf – to accounting services that access your bank accounts to pay your bills. And these are just the first to spring to mind – capable coders will have much more in store for us.

Enhancing competition in retail banking

The third aim of PSD2 and Open Banking is to enhance competition in retail banking.

Much has been written about the impact that PSD2 and Open Banking will have on the status quo. To some they present an existential threat to retail banks which will change the landscape as we know it.  

The way we bank is changing, but the banks themselves are, in many cases, sticking to old habits.

As well as clearing the way for small start-ups, some are fearful that the opening up of data will encourage tech giants like Facebook, Google and Amazon to create platforms that can bypass incumbents entirely.

So what’s the truth? The honest answer is we just don’t know for certain. We are entering into uncharted territory here, armed only with our best estimates of where the market will go.

One thing is for certain though, compared to many other sectors – and we’ll hear from Vodafone in a minute - retail banking as we know it has long been due a shake-up.

The odyssey of innovation that has heralded changes to the way we work, the way we consume entertainment and the way we communicate has only made its way to the edges of retail banking.

Fundamentally, the way banks do business has remained virtually unchanged over many years. In spite of the technological disruption and societal changes that have been a hallmark of recent times, the same few firms still dominate the market, with modest new entry or innovation.

The traditional retail banking business model – full service large retail banks offering mortgages, lending, savings and current accounts – has been largely static.

This immutability can also be seen in the tendency of consumers to stay with the same provider and product for years on end.

Our Financial Lives survey, published last month, showed that 29 million UK adults with a day‑to‑day account (that’s a current account for most of us) are long‑standing customers, having held their account for 10 years or more, while only 6% of UK adults switched their account in the last three years.

Meanwhile, the way consumers engage with financial services has changed vastly over time. Now it’s not just the younger generation who are increasingly comfortable using an app or website to handle their banking needs, with 72% of the UK adult population having conducted banking activities online in the last 12 months.

The upshot? The way we bank is changing, but the banks themselves are, in many cases, sticking to old habits.

Opportunities for all

Now there are some logical reasons for that, but this will change as PSD2 and Open Banking come into effect next year.

We have to be careful about the hype. This will not be sudden or dramatic. There will be offerings from new players and existing brands alike. It is likely to take time for a winning formula to emerge.

It is certainly true that the opening up of data required by the regulation creates opportunities for new players to come through.

But incumbents, too, can ride the wave. For innovative thinkers prepared to look beyond their traditional parameters, opportunities abound - especially for trusted brands.

Our regulatory sandbox is testament to that. In operation since June 2016, the sandbox allows firms to test innovative products, services and business models in a live market environment, while ensuring that appropriate safeguards are in place.

It also provides a great window on some of the most original thinking happening in the sector today.

For example, we’ve seen first-hand how data sharing between large firms and fintechs can benefit all involved, and can deliver benefits to consumers.

In one particular case, a large firm partnered with a fintech company to provide a product aimed at increasing customers’ savings. Customers gave the large firm permission to share their current account data with the technology provider, which used it to identify where it would beneficial for the consumer to transfer money to a savings account.

Meanwhile, one of the biggest high street banks  recently announced they are testing an open banking platform that lets customers see all of their accounts, no matter who the provider, on one screen.

This is only the beginning. Bright minds and agile thinkers will push the boundaries far beyond what we believed to be possible.

Exploring the industry today

As the economic, technological, social and regulatory change of recent times continues to gather pace, the regulator must keep up with the rapidly evolving landscape.

That’s why in May we launched our strategic review of retail banking business models.

Through this discovery work we want to understand the impact of recent changes on firms’  business models, and how this might affect conduct and competition in the sector.

Specific areas of interest include:

  • how the free-if-in-credit banking model is paid for, and whether certain consumers are suffering detriment as a result
  • what impact the growing use of digital channels and declining use of branches is having on business models and what the implications for consumers are
  • how emerging business models differ from traditional business models, as well as looking at all retail banking business models in greater depth

Fundamentally, we need to understand where and how banks actually earn their revenues and returns, how this differs between firms and how it might change in the future. As the old saying goes we need to ‘follow the money’ and see where it leads.

If we want a sustainable market serving consumers, we have to plan now.

As well as exploring business models, this will also provide real insight on conduct and culture in retail banking – the PPI scandal taught us that lesson.

So why is this project taking place now?

I know there will be voices pointing to the scale of activity being undertaken in the sector – Brexit, ring-fencing, CMA remedies – and ask why we adding to the in-tray.

We’ve got sympathy for that – we are not immune to the same wider pressures. But the simple answer is that there will never be a perfect time to do it. Being at the coalface of consumers’ financial lives means there will never be a truly quiet moment for retail banking. If we want a sustainable market serving consumers, we have to plan now.

The reality is that if we’re really going to understand the impact of economic, technological, social and regulatory change on business models, we have to delve into the sector precisely when that change could be about to happen.    

Tomorrow’s world

The strategic review is really a fact finding mission – to broaden our understanding of the retail banking world today, and what it might look like tomorrow.

I’ve said that we can’t be certain about what comes next. But we can think in an informed way about possible scenarios for the future.

I don’t think it’s a stretch to say that we’ll begin to see new business models emerging. This could include challengers taking on specialist niches – either previously serviced by incumbents, or never serviced before. And that’s an exciting prospect for consumers.

Some banks have told us we could also start to see a model emerge in which large banks provide the back office infrastructure and challengers, perhaps trusted technology giants, provide the consumer interface.

That in turn could change the face of our high streets as firms extend branch closure programmes to free up money for technology, big data and upgrades to their IT systems.

Yet the incumbent banks have significant advantages in terms of their established mix of business and familiarity with banking regulation around the world that places them in a strong position towards both challenger banks and even big new entrants.

While for some consumers the shift in technology will be welcome, for others, such as those less likely to have internet access, the decline of physical branches creates an almost insurmountable hurdle between them and their finances. As we found in our Occasional Paper on access last year, this includes not only disabled or elderly people, but also those who live in rural areas – where the closure of one local branch can affect many small communities for miles around.  

There is a real risk that if technology and innovation move too quickly, the more vulnerable in society could be at a severe disadvantage. As firms, whether old or new, grapple with the challenges and benefits of innovation we will also expect them to develop plans to deal with those who are more vulnerable, rather than simply leave them behind.

This means we need to, more than ever, make sure we can deliver a clear vision for the retail banking sector.

Our ambition for retail banking

So what’s our ambition for this most important of industries?

Retail banking should be a sustainable market, one where firms focus not just on what happens today, but also in the long term. Culture and ethics will be a key aspect as we’ll discuss in the panel later. 

The mere ability to push the envelope is not enough if there is no tangible benefit to consumers at the end of it.

It should be a safe market, one where firms are resilient against cyber-attacks, where effective AML controls are in place and customer data are kept secure.

We can’t be certain of its precise shape, but we might look for a mixed ecology of incumbents and challengers.

And that market should be a competitive market – one where consumers, including the most vulnerable, are at the heart of everything a firm does. That means offering choice and good value for money, treating customers fairly and fostering innovation in their interests.

That last part – in their interests – is crucial.

Very many of the technologies we are looking at, the use of big data and sharing of personal information, have the ability to be used to create great value for consumers or create harm.

As the regulator, it is not for us to dictate what the precise products and services of the future should be. Rather, our role is to ensure that those that emerge produce good consumer outcomes.

The goal is not technology for technology’s sake. The mere ability to push the envelope is not enough if there is no tangible benefit to consumers at the end of it.


This is a challenging time for retail banks and regulators alike. But with challenge comes opportunity. We want the regulatory climate to be open to and foster those opportunities.

Innovations that were once ground-breaking become rudimentary, with possibilities to make a genuine difference in the lives of ordinary people and transform businesses.

Our focus, as regulator, will be on harnessing the potential of this new age for the good of consumers.