FinTech challengers driving competition in retail banking, FCA finds

The Financial Conduct Authority’s (FCA’s) strategic review of retail banking has found that growing competition in the sector is driving choice and lower prices for consumers and small businesses, despite the financial impact of the pandemic.

In an update to its 2018 strategic review of the sector, the FCA found that, while still strong, there are signs large banks’ historic advantages are starting to weaken, driven by digital innovation from the FinTech challengers and changing consumer behaviour.

The economic environment – in particular sustained low interest rates – has also constrained banks’ financial returns, the regulator said.

The share of personal and micro-business current accounts held by digital challengers rose between 2020 and 2021, while the largest banks saw their share fall, the review found.

This trend occurred even as large lenders lent proportionately more to microbusinesses during the pandemic.

The evidence gathered for the review suggests that intense competition, partly driven by the increased use of brokers, has benefited mortgage borrowers through lower interest rates, though these make it more difficult for smaller lenders to compete.

FCA reforms to the credit market are also having an effect, the regulator said, with lenders’ yield – a measure of financial return – for unarranged overdrafts falling sharply in response.

Measures put in place by the FCA to support borrowers financially affected by the pandemic also resulted in a drop in yield on authorised overdrafts.

Adoption of digital innovations by banks and their customers, accelerated by the pandemic, has also improved service quality and satisfaction, particularly for mobile and app-based users, the review found.
Further improvements through innovation are likely to be enabled by initiatives that allow the sharing of consumer data in secure and convenient ways such as Open Banking, the report said.

Kate Collyer, chief economist at the Financial Conduct Authority, said: “Competitive pressures and innovation are starting to deliver for retail banking customers, with greater choice, lower prices and more convenient ways to bank.

“But changes that may benefit many of us can also be a risk to those in vulnerable circumstances, which is why we have put in place guidance on the closure of branches and ATMs. We are also consulting on a new consumer duty to set higher expectations for the standard of care that firms provide.

She added: “Our research clearly shows the impact of the measures we took to reform the overdraft market and protect those financially affected by Covid.”

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