UK Regulator Outlines Scope of Retail Banking Business Model Review

The U.K. Financial Conduct Authority has published a paper outlining the purpose and scope of its strategic review of retail banking business models. The FCA launched the strategic review in April 2017 in order to deepen its understanding of retail banking business models generally. The FCA also wants to gain an understanding of how changes such as increased use of digital services and reduced use of branches have impacted on banks’ business models and whether this might have implications for the FCA's consumer protection and competition objectives. The strategic review will also help the FCA to understand how free-if-in-credit banking is paid for and whether this gives rise to concerns about the distribution of profits from different types of consumers or different products.

The paper outlines how the FCA uses business model analysis in conduct and competition regulation before discussing how the face of retail banking is changing. A new environment has emerged due to the rise of challenger banks in response to macroeconomic, technological and regulatory changes, the profound effect of technology on costs and customer behaviour, the effect of recent regulatory changes on competition and the expected significant increase in competition that will be brought about by the Competition and Markets Authority's Open Banking initiative and the implementation revised Payment Services Directive.

The FCA will focus on gathering information during the first phase of the strategic review. The FCA has developed a number of hypotheses about how all the changes might affect banks' business models. The second phase of the strategic review will explore these hypotheses in more depth, by examining: (i) the role and economics of personal current accounts and cross-selling; (ii) the competitive advantage of large "back books"; (iii) credit expansion and sub-prime lending; (iv) distributional issues for PCAs; (v) the competition advantages and disadvantages of alternative business models; and (v) the effect of technological change, greater intermediation and the future of branches in retail banking.

The FCA proposes to provide an update on its work in the second quarter of 2018.

View the paper.