The ongoing investigation by the Competition and Markets Authority (CMA) into the UK’s retail banking market continues to fascinate.
The latest note to be released by the CMA, on 24 September, was a summary of evidence taken from TSB.
I am obliged to TSB. Its evidence was candid and in part, advanced an argument I have been trying to get across for some time.
"TSB fundamentally believed that more choice did not equal more effective competition."
There seems to be an almost evangelical belief on the part of the current government, the regulators, consultants and the new start-ups that more players in the current account market will, by definition lead to more effective competition.
Perhaps the emphasis ought to be placed on the word ‘effective’.
I’d go further and agree with the gist of TSB’s evidence: it rejected the commonly held view that the current banking model is outdated and will not survive.
I’ll make the less than bold forecast that the Big 5 are not yet quaking in their boots about the majority of the start-ups.
Not a week seems to go by without wildly outrageous claims being made by one other vested interest arguing that Barclays, HSBC, Lloyds, RBS and Santander have had their day.
There are the larger challengers, for example, Bank of Ireland UK, Virgin Money, NAB UK (Clydesdale/Yorkshire) and retailers such as Tesco Bank, Sainsburys Bank and M&S Bank.
And there is the growing band of smaller challengers and start-ups: OneSavings Bank, Atom, Starling, CivilisedBank et al and just the other day another new entrant appeared on the scene in the guise of Secco Bank.
The argument beloved of the analysts goes something like this: the big banks have unwieldy legacy IT systems, costly real estate and horrendous compliance issues.
The new players are small, nimble, innovative, niche, and will have the winning culture of an Apple or a Google.
On the first point: the cost-income ratios of the big 5 average out at about 63%; Virgin, TSB, Bank of Ireland and NAB UK average out in the mid to high 60s.
On the point of nimbleness and product innovation, Tesco Bank took about four years to launch a current account and Sainsbury’s has yet to dip its toe into that water.
As for the respective mobile bank offerings – as things currently stand – can anyone really suggest that the new players offer a better mobile banking experience or greater functionality than, say Barclays or RBS?
The new players yet to launch have work to do and are up against big players with deep pockets.
I cannot help but think back to recent Raiffeisen Bank investor presentations; it seems only yesterday but was in fact circa 2010-2011.
It wanted to grow its retail business in Central and Eastern Europe – but, it argued, many of its target customers were frustrated by traditional branch banking and the inflexibility presented by banking in a physical branch.
So it launched ZUNO, a new digital bank offering a comprehensive range of services online, on mobile to win next generation, internet-savvy customers.
Zuno would expand its customer base and support its ambitious business growth objectives.
Fast forward to September 2015 and Raiffeisen has just disposed of the still loss-making Zuno subsidiary, but no matter.
It will be no surprise to see one or more of the established Big 5 snapping up some of the current digital start-ups – in or about 2018-2019 would be a fair guess – and hopefully the challengers will be able to cash out for a healthy profit.
By then perhaps, Clydesdale/Yorkshire might finally have found new and rather more enthusiastic owners than NAB.
In an attempt to be positive for the UK challengers: at the margins and where an underserved niche of the market is served, there is indeed a fantastic opportunity.
Shawbrook and Aldermore for example grew their loans to customers at CAGRs of over 80% and 50% in the period from 2012 to 2014.
The new players are successfully growing their net interest margins (NIMs) ahead of the big 5 largely due to the type of customers they have been targeting.
One thing is certain: the market is going to remain hugely fun to cover and become even more cluttered.
Level Playing Field?
Not content with unprecedented political support and encouragement and assistance from the regulators, the new players are mumping and moaning about the way their profits are to be taxed.
The challenger banks have mounted a vociferous campaign alleging that the established lenders will have an unfair advantage over challenger banks and start-ups relating to the banking tax surcharge.
What they need, they argue, is a ‘level playing field’.
UK finance minister George Osborne announced in July that the new tax will mean an 8% banking tax surcharge, on top of corporation tax, on lenders’ profits in excess of £25m.
Leaving aside the rather obvious point that many of the challenger banks will not make a profit of £25m for some time – Metro Bank for example is yet to break even – the challengers and start-ups are unlikely to win this argument.
It is a bit rich to claim that Osborne’s modest proposal will somehow stifle the UK fintech sector or strangle at birth the many new banks at varying stages of the licensing process.
The new players would no doubt welcome some kind of tiered structure for the banking surcharge; no doubt they would welcome Osborne penalising the established players by varying the amount of capital they need to hold.
I expect Osborne to stand his ground and he will be right do so.