The FCA has announced a strategic review of retail banking business models.

The aim of the review is to:

• understand retail banking business models in greater depth by looking at the business models of firms to identify any potential conduct or competition issues;
• understand how free-if-in-credit banking is paid for, in particular whether it leads to any distributional concerns between different types of consumers; and
• understand the impact of changes such as increased use of digital channels and reduced branch usage on business models and consider potential consequences for its consumer protection and competition objectives.

The FCA states that phase 1 of the review will focus on achieving an enhanced understanding of existing retail banking business models and the economic markets they serve, from a supply side perspective.

Specifically, the FCA expects to:

• understand which areas of retail banking (different product types and different parts of the value chain) are profitable and which are less so and why;
• examine how profits are distributed around the various participants within the market and the reasons for this pattern;
• consider how revenues and costs in one business area may be linked to those in another, to shed light on any inter-relationships, cross-subsidies and incentives to cross-sell different products;
• take an in-depth look at personal current account profitability to understand: (i) the role of free-if-in-credit banking for the broader business model; and (ii) how different types of consumers may generate different contributions to profits from their personal current account usage, and consider whether this creates distributional concerns; and
• probe how emerging business models differ from traditional business models.

In phase 2 of the review, the FCA will seek to evaluate the impacts of changes in economic, technological, social and regulatory factors on retail banking business models, with a view to identifying any risks to its competition and conduct objectives.

The FCA envisages that the review will encompass financial service providers including retail banks, building societies and credit unions. In view of the large share of the UK market served by the larger retail banking groups, the FCA will inevitably place most focus on these firms, but it is also keen to draw from the experiences of other firms. The FCA expects to look across the retail banking balance sheet and to consider the full range of personal banking products/services and small/medium enterprise banking. For example, the FCA wants to understand profitability by product or service type. This may include current accounts, cash savings, mortgages, secured and unsecured lending, credit cards and general insurance distribution. As the FCA progresses its analysis it may choose to focus on specific areas in more detail.

In terms of next steps, the FCA plans to engage with relevant financial services providers (including retail banks, building societies, credit unions), as well as consumer bodies during May and June 2017, prior to issuing an information request to firms. The FCA expects to produce a project update in Q2 2018, explaining its preliminary analysis and conclusions from phase 1.

View FCA announces strategic review of retail banking business models, 11 May 2017