In April 2017, we blogged that the FCA launched a strategic review of retail banking business models.

The FCA has now published Strategic Review of Retail Banking Business Models: Purpose and scope. The paper provides further detail on the strategic review’s purpose and scope ahead of engaging with firms to gather information. The paper is structured as follows:

  • the context for the strategic review;
  • how the FCA uses business model analysis in conduct and competition regulation;
  • the changing face of retail banking;
  • the potential effects on retail banking business models; and
  • the FCA’s approach to information gathering and next steps.

In its paper, the FCA notes that it wants to understand how firms have reacted to regulatory changes that have encouraged competition and the impact of technology, the way firms are likely to respond to future pressures and how this will affect the development of retail banking business models and the potential implications for consumers. To underpin this understanding, the FCA identified the following hypotheses about how business models might be affected by these changes:

  • the role and economics of personal current accounts (PCAs) and cross-selling. The FCA notes that if in the future the propensity of consumers to move PCA balances from their main bank increases, this may affect larger banks’ ability to use them to fund longer term lending and so fulfil their traditional maturity transformation role of converting short-term deposits into longer-term lending. The FCA wants to understand how these factors change the economics of PCAS and how banks may have to change their retail banking business models. In addition, the FCA is also interested in the economics of business current accounts, which are different to PCAs because they typically levy transaction charges;
  • the competitive advantage of large “back books”. The FCA wants to understand how future developments that might erode the number of back book customers may affect the economics of retail banking business models and what changes they may make as a result;
  • credit expansion and sub-prime lending. The FCA wants to know whether the benign credit risk environment and competition has made firms relax their credit risk appetites, leading them to take on riskier forms of lending or lend more to consumers who are already in debt. The FCA also wants to understand the extent to which large banks have taken on significant “sub-prime” or non-standard credit risk and the implications of future interest rate rises on profitability;
  • effect of technological change, greater intermediation and the future of branches in retail banking. The FCA wants to understand how banks are investing in technology, and what the future role of branches will be in retail banking. In particular, it wants to understand how banks see the importance of branches in, for example customer acquisition and marketing, fulfilling account opening processes, and transactional banking services. The FCA also wants to understand any potential impact of branch closures on vulnerable consumers. In addition, the FCA will prioritise consumers to secure an appropriate degree of consumer protection;
  • competition advantages and disadvantages of alternative business models. The FCA wants to know more about how the cost structures of the different participants in retail banking could change and how this could affect competition. The FCA also wants to understand how bank capital requirements affect the business models of different banks. The FCA is also interested in how changes in the larger banks’ business models and charging structures could affect the revenue streams of challenger banks; and
  • distribution issues for PCAs. The FCA is interested in whether vulnerable PCA consumers are particularly profitable for banks. The FCA is also interested in the profitability of PCA consumers who hold other core retail banking products and insurance products.

In terms of next steps, the FCA intends to approach the first phase of its work in at least two sub-phases, with the first focused on getting readily available firm management information. This covers both quantitative aspects of the underlying business and product lines within the firms, such as: (i) strategic plans; (ii) pricing policies and risk appetite statements; and (iii) quantitative financial and non-financial information such as management accounts, customer segmentation and new business volumes. The FCA will use this information to establish a base line understanding of the business models within retail banking. This phase will also allow the FCA to identify areas, themes and issues it may want to investigate further, and for which the FCA might require more detailed and prescriptive information.

View FCA strategic review of retail banking business models, 26 October 2017