Banks to go the same way as pubs? OFT boss moots branch sharing to increase competition
UK retail banks could be forced to share branch premises with rivals under plans to increase competition in the market, according to the chief executive of the UK’s Office of Fair Trading, Clive Maxwell.
Giving evidence to the Parliamentary Commission on Banking Standards Committee, Maxwell said that a range of options could be considered as ways of increasing competition in retail banking if the OFT were to refer the issue to the Competition Commission, which has statutory powers to reform industry sectors.
He outlined several models that could be used, the “most obvious” of which would be a “horizontal chopping up of the banks” that would “take out certain bits and put them under different ownership”.
The intention would be to overcome the cost barriers to entry for new entrants – so-called “challenger banks”.
Asked if this would lead to a market structure where some banks would opt to become providers of back-office services to others offering “front-office”, customer-facing services, Maxwell said: “You could envisage that, but whether it’s the right thing to do is not clear.”
While this could reduce the cost of entry to the market by minimising IT investments for some, others would be left with sunk costs that would have to be written off, he said.
Another option, said Maxwell, could involve some sort of shared access to branch facilities. “Access to a branch is something that most people want,” said Maxwell. “It is possible to envisage sharing of that.”
He suggested a possible parallel in the way that a perceived monopoly in the UK brewing and pub industry was reformed by the Monopolies and Mergers Commission a decade ago. At that time, six brewers were responsible for 75% of beer production and owned more than half of all pubs, which had to sell their owners’ beer – known as “tied houses”.
This, it was decided, constituted a complex monopoly that acted in favour of those breweries that owned tied houses. The solution was to limit the number of pubs breweries could own to 2,000 each, which created a new market into which stepped new entrants – known as “pubcos” – the effects of which remain controversial.
Industry analysts were unanimous that the suggestion that retail banks might share branch premises with competitors is unlikely to gain traction, but agreed that there are opportunities for banks themselves to change the structure of the industry: even if they are not forced to do so by statute, basic economics is already pushing them in this direction.
“I’ve been following the Commission hearings and some of the ideas are insane,” said independent analyst Ralph Silva. “My views are simple: retail banking as we know it is dead, let it die.”
Silva agreed that there is still a demand among consumers for branch-based services, but argues that this is largely for advisory services, which are no longer on offer.
“Retail banks have a strong history of advisory centres, and as such they were incredibly valuable: people would walk into a branch and talk to a human being about how they should invest or manage their money. Today, however, banks have all but pulled out of advice and this is what’s killed them,” he said. “People no longer have a reason to talk to a banker, they are pushed to technology channels and as a result product decisions are based on price points. On this level, the high street banks are perceived to be the same as grocers, car companies and electronic giants. If the products are the same and the service is the same, than why not get your product when you’re paying for your bananas, leasing your car or buying the large screen TV?”
Daniel Mayo, practice leader for financial services technology at industry analyst Ovum, said: “It is quite old school thinking in terms of regarding branch as hub of customer relationship for new entrants these days. If they really want to facilitate new entrants they would be better to make it easier to set up from a regulatory and capital perspective.”
This was echoed by Peter Farley, an independent banking industry consultant, and former European head of IDC Financial Insights. “The real barriers are on the capital requirements,” he said. “There are plenty of things that the banks could share in terms of infrastructure, but the presence that branches give isn’t going to be one of them.”
Farley agrees with the proposition that IT costs constitute a barrier to entry for challenger banks, but he says that this is also a major problem for the incumbents as they face plummeting profit margins.
Plenty of precedents exist outside the UK, and in other areas of banking, he points out. Deutsche Bank, for instance, makes a virtue of the white labelling model in the transactional banking services it markets to smaller banks; banking co-operatives like Rabobank in the Netherlands have grown up with this approach as part of their business model; and it has been deployed successfully by the likes of Cincinnati-based Fifth Third Bank in the US, which provided IT and infrastructural services to other banks in its region through a division that has now been spun-out as Vantiv, running a single platform.
He is less optimistic about such an approach catching on in the UK in the near future, however: “The big banks just don’t talk about this in any real sense,” he said.
Alex Kwiatowski, research manger, EMEA banking, at IDC Financial Insights, said that he hadn’t heard of shared premises being mooted as a serious possibility. “There has been talk of shared IT systems and services, which makes a measure of sense as they’re hidden from view and don’t pollute existing brand marketing efforts,” he said. “I can imagine the chaos that would ensue if a new]rival was permitted to share space with an established provider, so getting this particular idea to fly is going to be hard, if not impossible.”
Besides, he added. “given the rapid rate of decline on Britain’s high streets, it’s not as if there’s a shortage of empty property for a new entrant to lease …”