THE BIG, internationally-exposed banks are scrambling to work out what Brexit will look like, and what they will have to do to continue to serve EU-based clients. Alongside this intensive preparation, these banks face their ringfencing deadlines in January 2019, just two months before the UK's scheduled EU exit.
Ringfencing operations, designed to limit the damage from another financial crisis, will add to their cost burden and could create more disruption: it emerged yesterday that at HSBC alone, ringfencing has already cost £400m.
With the bigger lenders consumed by all this activity, challenger banks have privately identified a burgeoning opportunity.
As Paul Lynam, chief executive of Secure Trust Bank and chair of the Challenger Bank Board at UK Finance, says: “Given their scale relative to the dominant banks there is clear scope for well-capitalised and disciplined smaller banks to take market share from the larger banks.”
The challengers need to offer a compelling proposition if they are to continue to grow. Continued commitment to good customer service and transparent charging should help them win customers and build the longed-for scale that would allow many to offer a wider range of products.
They do, however, have the advantage of being unencumbered by the legacy IT systems that often hinder established banks. This makes them nimble in terms of harnessing the latest fintech innovations to distribute their offerings.
And the upstart banks will not have to go through the same re-engineering as the systemic ones who, for example, may face capital floors from the Basel committee. The newer players are less at risk from regulatory interventions like that of the FCA into the overdraft market, announced yesterday; they are less threatened by potential disruptors such as Facebook and Amazon.
Following several years of playing David to the high street's banking Goliaths, it looks like challenger banks' time may have come. But success will not be a walk in the park. Lynam highlights that their biggest single challenge will be to maintain discipline if and when the economic outlook weakens, especially if others adopt an aggressive lending stance. In other words, they must not repeat the mistakes of the past. After all, being a challenger is all about doing things differently.