Strategic review of retail banking business models

May 2017
Purpose & Scope Paper
Progress Report

We are reviewing the business models used in the retail banking sector and evaluating the impact of changes on competition and conduct.

Retail banking has been experiencing significant economic, technological, social and regulatory changes. The effects of these changes are expected to continue in the coming years, with ‘lower for longer’ interest rates, Open Banking, increased use of digital channels by consumers, regulatory interventions such as ring-fencing, and the remedies introduced by the Competition and Markets Authority (CMA). 

Against this background, we have been considering what we need to do in order to build a robust evidence base to enhance our understanding of the state of competition and conduct in retail banking markets at a pivotal time of change.

We want to understand the impact of changes in retail banking business models and the implications for our objectives to protect consumers and promote effective competition, with the ultimate aim of ensuring our regulatory approach remains fit for purpose.

To achieve this, we will be conducting a strategic review of retail banking business models – a programme of discovery work to examine the business models used in the retail banking sector and evaluate the impact of changes on competition and conduct.

Aims of the review

The review will seek 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

Scope of the review

Phase 1 of our work will focus on achieving an enhanced understanding of existing retail banking business models and the economic markets they serve, from a supply side perspective. Specifically, we expect to:

  • understand which areas of retail banking (different product types and different parts of the value chain) are profitable and which are less so and why
  • examine how profits are distributed around the various participants within the market and the reasons for this pattern
  • consider how revenues and costs in one business area may be linked to those in another, to shed light on any inter-relationships, cross-subsidies and incentives to cross-sell different products
  • take an in-depth look at personal current account profitability to understand: 
    • (i) the role of free-if-in-credit banking for the broader business model and
    • (ii) how different types of consumers may generate different contributions to profits from their personal current account usage, and consider whether this creates distributional concerns
  • probe how emerging business models differ from traditional business models

In phase 2 we will seek to evaluate the impacts of changes in economic, technological, social and regulatory factors on retail banking business models, with a view to identifying any risks to our competition and conduct objectives.

We envisage that the review will encompass financial service providers including retail banks, building societies and credit unions. In view of the large share of the UK market served by the larger retail banking groups, we will inevitably place most focus on these firms, but we are also keen to draw from the experiences of other firms.

We expect to look across the retail banking balance sheet and to consider the full range of personal banking products/services and small/medium enterprise banking. For example, we want to understand profitability by product or service type. This may include current accounts, cash savings, mortgages, secured and unsecured lending, credit cards and general insurance distribution. As we progress our analysis we may choose to focus on specific areas in more detail.

In October 2017, we produced a Purpose and Scope paper, which provides further detail on the aims of our work and the issues we are considering, in particular – the role of business model analysis in conduct and competition regulation, the changing face of retail banking and the potential effects of change on retail banking business models.

Differences between our review and the CMA investigation

Our review is fundamentally different from the CMA’s retail banking market investigation. The CMA’s market investigation focused on personal current accounts and small/medium enterprise banking. Our review will look across the retail banking balance sheet and consider other product areas such as savings and consumer lending. The focus of our review is broader than that of the CMA’s because we have a consumer protection objective as well as a competition objective.

However, while broader in its product coverage, we are not proposing to:

  • evaluate fully the functioning of competition in retail banking markets – our work aims to identify areas of concern that could warrant further investigation or intervention using competition or conduct powers
  • consider in the first phase whether or not firms are making persistent excess profits over time (in the way the CMA might do) – our work is about understanding business models and what conduct or competition concerns these models might create
  • examine in detail the consumer journey (for example, how can price transparency and price comparability be increased, what product/service features matter most, and what are the barriers to switching?) because these questions have been considered recently by the CMA, and we are already considering them separately in the work that we are undertaking following the CMA’s market investigation, and our Consumer Lives, among other studies

Relationship with our other work

We will be conducting this work alongside other relevant work in the sector, in particular the work that we are undertaking in relation to prompts and alerts, service quality information and account opening and switching processes, as well as our high-cost short-term credit review. The review will inform and be informed by these other projects.

Next steps

We are continuing to engage with relevant financial service providers (including retail banks, building societies, credit unions), as well as other interested stakeholders.

In June 2018, we published an update report on our analysis so far. Following publication of that report, we are furthering our analysis and developing our consideration of possible future scenarios.