The report by business advisory firm Deloitte warns that banks burdened with higher regulatory capital requirements will have to cut costs and invest heavily in their IT systems if they are to remain competitive.
Deposit guarantees and new technology are making it easier for new players to enter the banking sector. The firm estimates that it can cost less than £10m to set up a relatively simple small bank and just £5m a year to run it.
“Banks’ access to cheap funding via current accounts is under threat and will force them to redesign their business strategies. They will have to slash costs, accept that they can no longer subsidise loss-leading products and will not be able to operate such large branch networks,” Deloitte lead banking partner Zahir Bokhari said.
“As competition from alternative sources of funding intensifies, banks will need to re-invent their technology infrastructure. It is not credible to anticipate healthy returns while operating inflexible IT systems based on 1970s technology.”