On the 12th September the ICB will release their final report on banking sector reform, the purpose of which is to improve the stability and competition in UK banking. The report will have ramifications for all banking customers, from large-scale corporate organisations looking to raise capital, to the end consumer looking for the best savings account. Despite the ongoing debate around how best to insulate investment and retail banking operations from each other, one issue the ICB’s interim report is clear on is the need for greater competition in a retail banking sector dominated by a few large players.
The ICB feels competition can be stimulated by decreasing the market share of the largest banks in line with European Commission conditions, but also by creating an easier process for customers to switch banks. By making Lloyds Bank sell off 600 branches and divest itself of a fifth of its mortgage book, the scene is also set for new entrants on the high street (current potential buyers are National Australia Bank, NBNK and Virgin Money). The potential end-point will be a larger number of service providers going after the same amount of customers, who have far fewer barriers to switch.
Since the start of the economic crisis the general public has become a savvier group. With household budgets being squeezed by inflation and pay freezes, consumers are more frequently using online aggregators to seek out the best rates and deals. With the ICB about to ease the transition between providers, UK banks face a tougher proposition convincing customers to stay with them.
But this is exactly what the banks are going to have to do. With an increasing number of players in the market, banks are going to have to focus on customer retention alongside customer acquisition and product sales. To do this they are going to have to deepen their relationship with their customers, and this is already forcing them to place a greater focus on customer service and loyalty initiatives. A recent example is Santander’s innovative “1, 2, 3” marketing, where existing customers are offered preferred rates and cash incentives to take more products out. An innovative and personalised approach to financial products and services is where the whole banking industry should be heading, and it is where the ICB will be looking to drive it.
From our work amongst both key influencers 1
and the general public we can see that new entrants are already getting noticed. The new Metro Bank, with its offer which is focussed on providing high and differentiated levels of customer service is receiving praise, and industry commentators are still expecting exciting things from Tesco Bank in the future. In particular, the potential to combine Tesco’s retail and financial services databases to tailor products and service levels to the needs of individuals is something the more established banks will be wary of.
Retail banking is changing rapidly, and the ICB’s report will speed up its evolution. Unless the UK’s largest banks start making it worthwhile for their customers to remain loyal, they are slowly going to lose customers to competitors who do.
Note 1: Ipsos MORI conducts syndicated key influencer tracking surveys amongst a number of audiences including Personal Finance Journalists, Business & Finance Journalists, MPs and Captains of Industry.