Strategic review of retail banking business models

May 2017
Purpose & Scope Paper
Progress Report
Final report

We have published our Final Report into retail banking business models, following on from our Progress report in June 2018. 

Read Final report (PDF)

Read Annex reports (PDF)

The Retail banking sector performs a vital role in the economy. There are around 73 million current accounts (PCAs) and 4 million business 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 £1.4 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.

Objectives of review

To understand the impact of change on retail banking business models, and the implications for consumers, we launched an exploratory programme of work in April 2017. The objectives of this review, 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

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, due to:

  • significant funding cost advantage from large numbers of customers holding balances in PCAs paying no interest, and in savings accounts which pay lower interest rates than other providers
  • significant additional income from fees and charges on PCAs, particularly overdraft charges
  • the ability to cross-sell lending products to PCA customers
  • the ability to cross-sell business current accounts (BCAs) and associated business savings balances, which also pay no/low interest

Final Report

Our Final Report extends this analysis beyond the PCA and informs our view of emerging scenarios in retail banking and their impact on consumers. It is founded on business model analysis of around 40 firms active in retail banking and on the output of our September 2018 conference on the future of retail banking. We also examine the impact of branch closures, provide an update on our distributional analysis of PCAs, and analyse the profile of customers who switch PCA provider.

Our Final Report confirms our view that the PCA is an important source of competitive advantage for major banks:

  • PCAs bring cheap funding from customer deposits and additional revenues from overdraft fees and other changes
  • major Banks with large PCA networks have a net advantage even when the costs of providing the PCA and branch network are taken into account
  • FIIC PCAs depend on banks generating funding benefit from balances as well as fees on overdrafts, interchange revenues, and other fees and charges. The majority of FIIC accounts make a positive contribution to bank profits

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 outcomes for many consumers and small businesses in the form of little or no interest on credit balances, high charges, and pricing models that can work against loyal customers.

Banks are closing branches across all regions of the UK in response to declining branch usage. People are having to travel further to reach branches.

Innovative business models and competition could deliver better value and enhanced customer service, including:

  • cheaper or more convenient payment or overdraft solutions separate from current accounts
  • budgeting and money management tools based on analysis of customer data
  • enabling consumers to search and switch for better deals on savings and lending, and potentially switch to new providers

Next steps

As a result of this review we will initiate 3 strands of work:

  • on-going monitoring of retail banking business models
  • analysis to understand the value chain in new payment services business models
  • exploratory work to understand certain aspects of SME Banking

We have also identified 3 potential areas requiring coordinated action in the future to ensure a retail banking sector that works well for consumers:

  • continued access to banking services
  • appropriate use of customer data
  • system resilience and effective prevention of financial crime and fraud

If you have any questions, please contact [email protected]