Watch out for increasing competition in the savings markets going forward.
Customer
Both consumers and SMEs will undoubtedly continue to want services provided faster and easier. But if confidence improves, could they be willing to pay a premium for superior service? At least until such levels of service becomes standard. Of course the flip side of this is that customer expectations will only continue to increase, and they will more likely vote with their feet around issues such as IT outages.
Continuing demographic shifts such as an aging population, the renting generation and inter-generational lending will continue to shape new market opportunities for specialist propositions addressing these needs.
Will we see open banking driven propositions gain more traction amongst UK consumers and SMEs?
Regulation
On the Prudential Regulatory Authority (PRA) agenda, banks will be busy working on regulatory reporting, operational resilience, a continued follow through on the fast growing firms review, and beginning to focus on climate change risk.
The impact of the Financial Conduct Authority (FCA) agenda could be higher than last year – for example, the impact of new regulation in peer to peer (P2P) and auto markets, and a continued focus on high cost credit. The activity of Claims Management Companies will also be one to watch as they search for business to replace the loss of income from Payment Protection Insurance (PPI) miselling.
Then as the 2021 expiration date for LIBOR looms ever closer, we expect to see market solutions begin to emerge.
We expect Challenger & Specialist banks to continue being vocal around the challenges to growth emanating from policy action such as internal ratings-based (IRB) accreditation, minimum requirement for own funds and eligible liabilities (MREL), the bank corporation tax surcharge and regulatory coordination (we were proud to support the response by UK Finance to HM Treasury’s call for evidence regarding regulatory coordination in October 2019).
We expect Challenger & Specialist banks to continue being vocal around the challenges to growth emanating from policy action such as IRB accreditation, MREL, and the bank corporation tax surcharge.
Potential outcomes
I said I wouldn’t make any predictions, but I’ll suggest a few potential outcomes from the above drivers that we may see in 2020.
- Whilst our EY ITEM Club base case is relatively muted, perhaps increased confidence, translating into more activity and credit demand, should give a marginally more positive trading environment than 2019, allowing Challenger & Specialist banks more room to respond to the drivers above
- The response to increased competition will mean new products and proposition launches, a continued low rate of new bank authorisations, consolidation and market exits, and an increasing focus on cost as growth becomes harder to achieve
- Customer demands, competition, the need to focus on cost, the burden of regulatory compliance – all mean an increased need to adopt new technologies – or risk being left behind
- Budgets will be challenged due to high mandatory spend on the regulatory agenda, but investment budget can be increased by reducing operating costs
- For those that don’t or can’t respond, there will be the odd failure or exit, but these will be driven by intense competition rather than credit stress
- 2020 could mark a tipping point for some B2C FinTechs, with others left behind unable to achieve scale. The P2P market is also likely to shrink rapidly to those with scale, with the rest becoming purely wholesale funded specialist lenders, or exiting the market
- To respond to both challenges and opportunities, we will see an increasing level of collaboration, alliances and partnerships creating an increasingly complex ecosystem
Other things to watch out for
- Repercussions from any Alternative Remedies Package public commitments not being met
- Big tech entering the UK market
- What Marcus plans to do with its £11bn of deposits
- Electric vehicle adoption and its impact on the motor market
- Sustainable finance and climate change risk becoming big agenda items
- How to attract/retain a high performing, diverse workforce bought into your purpose and values and motivated to achieve success
Summary
Increasing confidence, translating into further activity and credit demand, should give an improved trading environment for Challenger & Specialist banks. This allows for more room to respond to the competitive and regulatory challenges they face in 2020.