Banking on a New Regime

What’s going on here?

Small banks are finding it hard to compete with the Big Four banks

What does this mean?

It all began with the 2008 Financial Crisis, where America’s largest investment bank, Lehman Brothers, collapsed. This caused a domino effect globally, as all the stock markets across the world tumbled. The main aim for UK politicians and regulators was to pave a new lane for smaller banks to enter ‘Britain’s retail banking industry’. It was clear that more competition to the Big Four banks (Barclays, HSBC, Lloyds and RBS) was much needed. The government focused on encouraging new, smaller banks to enter the market.

One such newcomer, Monzo, was successful in getting its banking license, despite the challenges that faced them. It appears that Monzo and multiple others have secured licences thanks to the easier process set out by the policy makers in the Financial Services (Bank Reform) Act of 2013. The new Act made it easier by abolishing many of the cumbersome “barriers to entry” that were previously present. The success of Monzo and the dozen other banks clearly shows improvement… so what’s the issue?

What’s the big picture effect?

Even though there has been a lot more competition recently, there is a ‘glass-ceiling’ that small banks struggle to grow beyond. Whilst it is now easier to set up a bank, the high costs involved in the retail banking industry just reaffirm the Big Four’s competitive edge. The 6 largest banks in the UK controlled 87% of accounts in 2017, whereas the top 6 in the US only control 54%.

Radical banking reform has been slow, in favour of more modest steps. One new concept that has been introduced is Open Banking, which has been implemented by the CMA (Competition and Markets Authority). This initiative forces banks to share customer data with challenger banks to encourage “product innovation”. Only time will tell if this will adequately address the issue.

Smaller banks will only stand a chance if more radical legislative changes are made to disrupt big banks… and soon. This could include banning ‘free current accounts’, which the big players offer today. In fact, PwC even researched this and found that half of the customers would switch banks if they were charged a fee. The smaller banks would then potentially gain customers to accommodate for all the extra people on the lookout for a new bank and the best deal.

But then again, the banking industry was always going to be a tough nut to crack!

Report written by Kaush K.

If you're interested in writing for LittleLaw, click here for more information