Our view is that competition is already coming, not just in the flotation of the TSB or the divestment of Williams & Glyn next year, but from all of the challenger banks. The job of the authorities is simply to nurture that competition.
This is not a new topic – at least 38 competition or market investigations into the sector have taken place over the past 15 years. Further, banking is already more competitive than most people think, because it is not one market but many. Banks don’t just offer current accounts, of course, but credit cards, mortgages, personal loans and business banking.
Indeed, polling carried out by YouGov for the BBA shows that nearly six times as many customers (57 per cent) believe that banks offered them enough choice of products and services than thought not (10 per cent).
Yet merely settling for the current state of play is not an option. We believe banking is starting to witness the type of change that has already been seen in industries like supermarkets and airlines in recent years. There, new entrants like easyJet, Ryanair, Ocado and Lidl have changed the competitive landscape. The large airlines and supermarkets have not stood idly by. They have changed their businesses to compete for customers.
The same is now happening in banking. New technology has facilitated the arrival of a new breed of bank, like Metro, Aldermore, Shawbrook and Secure Trust, while more established players such as Handelsbanken, Santander, Virgin and Tesco have been expanding too. New banks continue to arrive, like Paragon and Tungsten, while Atom Bank will be launching next year as an internet only bank.
It is not just the institutions we bank with, but the way we bank, that is likely to change. Digital technology means we can now pay people using our mobile phones, receive account updates by text message, check our accounts using a digital app, and we will soon be able to pay in cheques by scanning them with our phone. According to YouGov, 78 per cent of people use online banking at least once a month and 53 per cent said they were confident they could do the vast majority of their banking online or over the phone. Having a large branch network is no longer a necessity to win new customers, which undoubtedly helps the challengers.
The BBA believes that competition is vital. The key to achieving this is to ensure that all banks, both big and small, can compete on a level playing field. That’s why we are today calling for four key changes in the areas of capital, funding, payments and regulation.
First, many of the challengers are currently required to hold more capital against their lending than bigger banks, because they have to use standardised capital weight rather than model-based weights. This is particularly important in safer areas of lending such as low loan-to-value mortgages. We support the call to allow challengers access to an average of the model-based weights of the larger banks. It would make it easier for challengers to recycle their deposits and increase lending.
Second, larger banks also tend to have an advantage in terms of funding because of their size. We propose a series of measures, including not restricting local authorities from depositing their money with challengers, making the Bank of England’s Funding for Lending Scheme more challenger-friendly, and considering in the longer term a new Funding for Challengers scheme.
Third, we urge the new Payments Systems Regulator to reform the payments system so that all banks have fair access, and pay a reasonable and transparent price to use the system.
Finally, we believe regulators should also look to be more proportionate when implementing regulation so that it does not adversely impact on smaller players. While all additional regulation means extra cost, the bigger banks are set up to cope with it, while small banks are not. The sheer burden of new rules can sometimes hinder competition.
The banking industry supports competition. Banks compete for customers every day. The challenge is to create the right conditions for consumers to benefit from even more competition.
James Barty is strategy director at the BBA. www.bba.org.uk