FCA shows evidence of growing competition to Big 4 in retail banking

In an update to its 2018 strategic review of retail banking, the FCA found that, while still strong, there are signs large banks’ historic advantages are starting to weaken, driven by digital innovation and changing consumer behaviour.

The share of personal and micro-business current accounts held by digital challengers rose between 2020 and 2021, while the largest banks saw their share fall.

The analysis updates the previous Strategic Review publication in 2018, allowing us to explore developments since 2015.

It uses business model analysis based on detailed financial information, data and documents from many deposit-taking institutions. This includes the largest banks and building societies and a selection of smaller banks and specialist firms.

This helps us understand how firms currently make money, as well as the strategic factors they consider when making decisions, such as which products to offer, their price, which channels to use and which customer segments to serve.

The FCA report and its supporting annexes explore changes in retail bank profitability and the drivers of those changes.

It also provide a detailed analysis of different products within the retail banking business model, namely Personal Current Accounts (PCAs), Mortgages, Consumer Credit and SME products.

The report looks separately at the Big 4 banks (Lloyds Banking Group, Barclays, HSBC and NatWest), scale challengers (Santander, Nationwide, Virgin Money UK and TSB), mid-tier firms (Co-op, Metro, Tesco and Sainsbury’s), digital challengers (Starling and Monzo) and non- PCA providers (Specialist lenders such as Aldermore, Shawbrook and Close Brothers) and traditional building societies.

There are signs that some of the historic advantages of large banks may be starting to weaken through innovation and digitisation and changing consumer behaviour.

The gap in profitability between large banks and smaller challengers has reduced in recent years, driven by competition in mortgage prices, innovations in banking services and reduced ability to lower funding costs, with rates on customer deposits already very low.

Collectively, digital challengers now have around 8% market share for PCAs. They have attracted customers in part by offering innovative mobile apps which make the experience of banking easier and more convenient and to help consumers manage their money.

Relative to the major banks, a smaller proportion of the digital challengers’ PCAs are main accounts. This results in lower balances, lower volumes of transactions, and lower overdraft usage. These lead to lower funding benefits and less scope to generate fee income.