The last 24 months have seen a remarkable reversal in the dynamic of UK retail banking, in which the dominant theme of the last 10 years - the relentless pursuit of balance sheet growth in the face of shrinking margins - has been replaced with a critical need to shrink swollen balance sheets, despite increasingly profitable lending opportunities.
With a substantial pool of untapped demand for cheap credit the attention has turned to new entrants and their ability to fill the gap left by the overstretched incumbents. However, cashing in on this opportunity is no simple task, and any business looking to establish a sustainable mass market franchise will have to overcome some significant barriers.
New entrants face regulatory hurdles which have been increased for good reasons but are nonetheless significant. Most importantly, there must be a strategy to fund the business in the long run. Loss-leading deposit gathering in the short term followed by tapping of wholesale markets when they return may not a sensible option. New banks will therefore have to offer something different. There will be many strategies from those who make it to market but many successful approaches are likely to feature the promise of high levels of branch-based service and simple products to attract the deposits that must form the core of any new entrant’s funding.
Evidence suggests that the British public is receptive to newcomers in banking, and conditions now exist for new entrants to gain a beachhead in the market. Fortune may just favour the brave, the innovative and the persistent, but the path to a future in British retail banking is likely to be longer and more complex than expected.