Wannabe lenders must be given a chance to shine

19 July 2010

Derailed, barrel-rolled and double-dipped more times than it likes to admit, the retail banking sector has endured a roller coaster ride these past 24 months - and the ride isn’t over yet.

After a short reprieve the pressure looks set to build once more as the Office of Fair Trading prepares to consider the evidence gathered in its review of the barriers to entry and expansion in the retail banking sector.

Labelled by the OFT as a knowledge-building exercise, the barriers to market entry, and facilitate increased competition.

Anything that aims to stimulate new lending and enable the recovery of the financial market is a step in the right direction and should come as welcome news for commercial and domestic bank customers.

The extent of any barriers to entry, expansion and exit in the retail banking sector uncovered by the review will affect how the market develops.
Indeed, the OFT has gone so far as to suggest that the review’s results, due out in the autumn, will form part of a broader inquiry into the banking sector promised by the government’s Banking Commission.

While a number of new high street lenders such as Metro Bank and Virgin Money are in the process of setting out their stalls their entry will not be without challenges - challenges that are certain to form a key part of the OFT’s review.

With no proven record, new entrants will find it hard to secure funding and gain customer trust in unknown brands, or in Virgin’s case a well-known brand that is not currently synonymous with the finance sector.

Unrated by prominent credit agencies, the higher cost of funds for new lenders may make their products and services significantly more expensive to customers.

They will need to develop innovative offerings to gain meaningful market share from the competition

So they will need to develop a variety of innovative product offerings to differentiate themselves from the competition and gain meaningful market share at the expense of larger banks, many of which are effectively nationalised.

New entrants will find it difficult to compete with existing lenders, not only on product pricing but also with regard to infrastructure and compliance.

Many will need to invest heavily in premises, people, processes and systems to keep pace with the changing market and stricter regulatory controls, while keeping one eye on the associated costs.

And that’s assuming these would-be lenders can convince the risk-averse Financial Services Authority to grant them a banking licence in the first place.

In an uncertain world, one thing’s for sure - the global financial crisis has led to substantial change in the lending industry with big banks recapitalised by the government, consolidation among other players and significant changes to financial regulation.

How the market develops will depend on the lessons and actions that emerge from the OFT’s review, along with other studies.

But regardless of how the lending sector shapes up, new entrants will play an important role in challenging existing market practices and driving forward innovation in areas such as pricing, products, diversification and customer service.

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