Review of barriers to entry, expansion and exit in retail banking : Q&As

Back to top

What are the main findings of the review?

In summary, the OFT has found that new entrants face significant challenges in attracting customers and expanding their market shares in retail banking.

While we have heard some concerns around the operation of regulatory processes, most firms are able to achieve the necessary regulatory authorisations to accept deposits and extend credit. They are also able to gain access to the necessary infrastructure to offer retail banking products, although for the smallest SMEs there is limited information available which may make it more difficult for new entrants to offer them banking products and, for certain types of firms, a lack of non-retail funding may limit their ability to grow.

However, we have found that new entrants face significant challenges in attracting personal and SME customers through a combination of low levels of switching, high levels of brand loyalty and consumers' preference for providers with a branch network.

These challenges pose the greatest barriers and can have the effect of deterring firms from entering the market in the first place if they do not believe they will be able to attract sufficient numbers of customers to recover start-up costs, grow market share and maintain a successful presence in the market.

Back to top

What was the scope of the review?

The review examined the existence and extent of barriers to entry, expansion and exit in the provision of retail banking services to both individual consumers and Small and Medium Sized Enterprises (SMEs). While the focus of the review was on the UK, it also considered whether conditions of entry, expansion and exit were different in Scotland and Northern Ireland.

The review examined four key themes when considering potential barriers:

• regulatory requirements and processes
• access to essential inputs, such as IT systems, payment schemes, information and finance needed to offer retail banking products
• the ability of new entrants to attract customers and achieve scale, and 
• issues around exiting the market.

Back to top

How does this review relate to government's intention to introduce greater competition into the banking industry and the recently announced Independent Commission on Banking?

The key aims of the work were to assist the OFT and others to better understand barriers to entry, expansion and exit in both personal and SME banking.

This review will be of value to the Independent Commission on Banking (ICB), which will be making recommendations by September 2011 on structural and related non-structural measures to promote stability and competition in banking for the benefit of consumers and businesses.

This review will also be of value to the Treasury Select Committee's inquiry into competition and choice in the banking.

Back to top

Why did the OFT do the review?

Retail banking has seen a number of long-term trends, such as growing consolidation and technological change. From summer 2007 onwards, the sector has been affected by the financial crisis. The financial crisis led to significant changes in the banking industry and there are proposals for regulatory change.

The changing market and the regulatory and other changes being considered set the context for this review. As was set out at its launch in May 2010, the purpose of this review is to gain a better understanding of barriers to entry, expansion and exit in personal and SME banking markets, and to understand better the long term competitiveness of the retail banking sector. It is designed to examine the existence, and extent, of any barriers to entry, expansion or exit in retail banking - both to help the OFT in its future work and to provide evidence and analysis to inform the wider public debate and the work of other authorities and bodies such as the ICB.

Back to top

Why did the OFT call this a review and not a market study

Market studies are a holistic look at all parts of a market and whether or not the market overall is working well for consumers. This review was more focused on potential barriers to the retail banking sector becoming more competitive. The review was also focused on building knowledge and, as such, it was not necessary that it would make any recommendations as would often happen in a market study.

Back to top

What statutory powers does the OFT have to do the review?

Under Section 5 of the Enterprise Act 2002 (EA02), the OFT has a general function of acquiring information about matters relating to the carrying out of its functions. The OFT may use its functions under Section 5 EA02 to carry out research into specific or narrow market-related issues. It is under this power that this review was carried out.  

[anchor How does this review relate to the OFT's bank charges and unauthorised overdraft work?

How does this review relate to the OFT's bank charges and unauthorised overdraft work?

This work built on previous work undertaken in the PCA market study which examined barriers to entry in respect of PCAs. This review looked at barriers to entry, expansion and exit in relation to retail banking as a whole (including personal current accounts, mortgages and loans) and in relation to business banking services supplied to small and medium sized enterprises. 

Back to: Barriers in retail banking