Is UK Government Really Increasing Financial Services Competition?

The United Kingdom’s Chancellor of theExchequer, a British cabinet member responsible for all economicand financial matters, earlier this year told JPMorgan Chase staffmembers at a company retreat the government wanted to introducemore competition in the market by reducing the influence of the bigfour banks (Lloyds, Barclays, HSBC, Royal Bank of Scotland orRBS).

George Osborne told theaudience: “The system isn’t working for customers, so we willchange it. I can announce today that the Government will bringforward detailed proposals to open up the payment systems. We willmake sure that new players in the market can access these systemsin a fair and transparent way.”

In the weeks and months since Osborne’s speech, the government hasenacted new rules that make switching bank accounts easier forconsumers. Previously, it could take up to three weeks for aconsumer to change accounts. Banks now have to transfer allapplicable information within a week and automatically sweep moneywrongly sent to the old account into the new one. With these newrules in place, a number of entrants are vying to capitalize onconsumer discontent and frustration with the major banks byoffering alternative financial and payment services.

Virgin Money was the first of the contenders to make a push, announcing in January that itwould increase its credit card capabilities and move processing inhouse under a new £1 billon ($1.59 billion USD) deal with MBNA, adivision of Bank of America. The move would make the company morecompetitive against banks and other financial institution in termsof card issuance.

Virgin Money, however, is not only looking at expanding its creditcard services. It is preparing to launch a new checking accountsometime in 2013, making Virgin Money a viable alternative to thebig four. While Virgin Money resembles traditional financialinstitutions in many aspects, other contenders are using theirbroad physical footprint to reach consumers and they don’tparticularly specialize in financial services.

Earlier this month, one of the leading domestic supermarketchains, Sainsbury, stated itsintention to improve its financial service offerings by acquiringfull control of its banking arm from Lloyds.The Sainsbury bank,which opened in 1997 as a joint venture between the supermarket andLloyds, has had five years of consecutive growth and made £59million (US$91 million) in the past year.

Commenting on the move, Sainsbury’s chief executive Justin Kinghighlighted the potential of the financial services offered by thesupermarket by stating, “We have 23 million transactions each weekby customers who know and trust the Sainsbury’s brand. We see agreat opportunity to increase the number of bank customers byoffering accessible, high quality financial services products whichreward customers who bank and shop with us. We expect the bank tobecome an important source of profit diversification and growth,building on the strengths of our core business.” With traditionalfinancial institutions suffering from poor public relations withthe British public, firms like Sainsbury that enjoy broad publicapproval may be able to tempt consumers to its financialservices.

Supermarkets such as Sainsbury and Tesco and entities like VirginMoney are not the only non-traditional financial companiesinterested in offering alternative checking accounts and additionalfinancial services.

The British Post Officein May announced a nationwide rollout of three different checkingaccount types in 2014. The most basic account is free and comesonly with a debit card and other basic functions. Consumers seekingadditional features such as comprehensive insurance are availableon an account for a monthly fee of £8 ($12.30). Consumers seekingto avoid costly bank charges such as overdraft fees, a thirdaccount will be available for a monthly fee of £5 ($7.68).

While the Post Office fees look steep, they compare well withsimilar accounts from Lloyds (£10) and HSBC (£15), respectively.Post Office checking accounts offer significant savings in thelong-term, a proposition particularly attractive to thoseconsidered unbanked or underbanked. Another advantage for the PostOffice is account access at nearly 12,000 branches, which issignificantly more than any other contender can boast.

Despite the government’s new rules, some 22 percent of the UKpopulation still find switching banks difficult and would do so inthe process was more efficient, according to YouGov research. Whilethe switching banks may still be an uphill struggle, some momentumwas made. Some 600,000 consumers switched banks in 2009 while 1.2million made a switch last year. “This will be a big year (2013)for switching, partly because of the faster switching service butalso because of the new entrants expected to shake up the market,”confirmed Laura Willoughby, chief executive of theMoveYourMoney.org.uk campaign, to the Guardian newspaper inApril.

So while getting consumers to make the switch from the big fourbanks (which hold 75 percent of all checking accounts in the UK)will be undoubtedly difficult, at least the British government hasheld its end of the bargain with the new rules. Whether new playerssuch as Virgin Money, Sainsbury or the Post Office can gain enoughtraction among consumers will be an interesting development tomonitor moving forward.

For more background information on the British payment market andon other European countries, see Mercator AdvisoryGroup’s research.