11 January 2019

Financial Times: Challenger banks complain about barriers to growth

Creating a path for new entrants in Britain’s retail banking industry was a key goal of politicians and regulators after the financial crisis. A series of bailouts and scandals convinced them of the need for more competition in a market which has been dominated by the same four banks for decades — Barclays, HSBC, Lloyds and Royal Bank of Scotland.

The advent of challenger banks such as Monzo is one of the most obvious signs of policymakers’ success. More than a dozen new banks have now secured licences.

However, many in the industry believe that competition is still far from healthy, and a report to be published soon is expected to say there is now a “glass ceiling” that challenger banks struggle to grow beyond.

The report — commissioned by new entrant Metro, among others — is due to say that while it has become easier to start a bank, measures to make the sector more financially secure have driven up costs and entrenched the largest lenders’ competitive advantage.

Several key markets are more concentrated than before the banking crisis. Britain’s six largest lenders — which include Santander and Nationwide — controlled 87 per cent of current accounts in 2017, compared with 80 per cent in 2000.

The chief executive of one mid-sized bank said that while the UK has “got rid of a lot of the barriers to entry”, it has added “barriers to growth”. He compared Britain unfavourably with the US, where the six largest banks control only 54 per cent of current accounts.

Several official reviews in the UK have considered radical reforms to boost competition in retail banking — including banning free current accounts, which serve to entrench the big lenders’ dominance. But such options have been rejected in favour of more modest steps to encourage people to switch banks.

Full article on Financial Times (subscription required)

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