Lack of consolidation among challenger banks is a problem

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What’s remarkable about UK retail banking is that a market with so much innovation and activity can cause so little real change.

A decade after post-crisis angst over competition in the banking industry, competing middle-market banks have proliferated, with foreign entrants also braving the UK market. The regulator has cleared nearly 30 new banks since 2013, from digital newbies like Monzo and Starling to this year’s budding North Champions GB Bank and Bank North.

What all this dynamism boils down to at the market level is disappointing. This is also an area sorely lacking in decent data, something that a regulator somewhere should surely rectify.

But a recent report from the Social Market Foundation (caveat: “supported by” Metro Bank) found that market focus for personal checking accounts and mortgages had barely changed since 2015. The market for personal checking accounts was more focused than before the financial crisis. , said the SMF.

Other figures also bear witness to the inertia of customers. Annual rates of change were stuck at 2 percent. A host of challengers such as TSB, Metro Bank and Virgin Money have failed to achieve the kind of market share that poses a significant competitive threat (which was referred to after the crisis as being 5 percent). The market share of the big six incumbents in gross mortgages has barely budged since TSB separated from Lloyds in 2013, according to figures from the UK Finance trade association.

These numbers don’t tell the whole story, of course. The fact that the cantonment forced the biggest lenders such as Barclays and HSBC to refocus on their UK operations and freeze funding in their UK banks resulted in tight pricing in areas such as mortgages. Incumbents have proven adept at emulating digital innovation and features produced by beginners, a sort of victory for consumers.

It doesn’t necessarily matter, because, as the competition regulator noted in 2016, this is a market where quality disparities – where digital banks and challenger banks still tend. do better – and prices don’t translate into a change in customer activity.

The effects of the pandemic are not yet clear. According to some research, lockdowns have accelerated digital banking adoption and increased the share of loans from challengers and fintechs. But channeling government support to businesses through the big banks offset the challengers’ gains in small business lending. Current account changes have declined further. The need to invest in digital arguably adds to the advantages of scale, in an industry where everything from data to compliance costs is already driving importance.

There is broad agreement that the banking challengers market needs to consolidate. But Co-operative Bank’s tilt to TSB has gone nowhere, and private equity group Carlyle said on Thursday it had ended talks to buy Metro Bank, the service-oriented challenger. client with a surprisingly high number of brilliant branches and a surprisingly small burst of retail deposits.

It can be tough to close deals right now: Metro Bank was trading at just 20% of tangible book value before Carlyle’s interest went public this month. Value investors (and really, who else would own them?) Fear selling, just as rising interest rates could improve profitability.

Metro Bank shares fell nearly a fifth on Thursday, despite warm words from the board about its self-sustaining outlook. Deal failures are a problem for new banks, many of which face an uncertain path to profitability, let alone showing they can produce decent growth and returns.

They are also a problem for regulators, who may have reservations about the private equity ownership model but face a market where it is unclear who has the appetite, expertise or credibility to lead. consolidation, and where they are increasing pressure to relax regulations for small lenders as part of their mission to help competition.

And they’re a problem for the rest of us, who by most accounts always pay too much for below average banking services.

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