FCA: Open Banking “crossroads” for banking sector

In its Strategic Review of Retail Banking Business Models report, the regulator notes that its early analysis has found that a key component of competitive advantage for incumbent banks to date has been the combination of personal current accounts and large branch networks.

The FCA found those networks, along with a critical mass of pre-existing customers, allow:

• A funding cost advantage from large numbers of customers holding balances in personal current accounts paying no interest, and in savings accounts which pay lower interest rates than other providers
• Significant additional income from fees and charges on personal current accounts, particularly overdraft charges
• The ability to cross-sell lending products to personal current account customers
• The ability to cross-sell business current accounts (BCAs) and associated business savings balances, which also pay no/low interest.

The review shows that most current account customers contribute to their bank’s profits, but a small proportion pay significantly more than others – around 10 percent of customers generate between a third and a half of all contributions to profits from current accounts.

Despite that, the introduction of Open Banking could open up the market, the FCA said in its review.

Open Banking enables banks, with customers’ permission, to grant third-party providers access to online accounts and payment services data, with a view to potentially offering them better deals.

“We now stand at a crossroads. Technological change, facilitated by Open Banking and the second Payment Services Directive (PSD2), has the potential to drive innovation and competition for the benefit of consumers,” it said. It added that although the impact of Open Banking has yet to be seen, having only been introduced in January this year, there is potential for the initiative to encourage switching.

Andrew Bailey, FCA chief executive, said: “This is an important piece of work to help us understand the complexities of the retail banking market and how this may develop in the future.

“It provides more evidence that there is no such thing as free banking. In particular, this evidence will inform the work we are doing on overdrafts, so we can fully understand the potential effects of the significant action we are considering taking in this market.”

The FCA is seeking responses, including evidence or views, by September 7, 2018. It added that the next stage of the review will look at a range of possible future scenarios, including what branch closure programmes mean for consumers and banks’ business models, and how technological and regulatory changes may affect the market.