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Strategic Review of Retail Banking Business Models

The accelerating pace of change from regulatory and technological developments brings the unprecedented potential to transform retail banking.

In our Progress Report, we noted that historically the market shares of the major banks have been high and stable and that the personal current account (PCA) and branch network have been a key competitive advantage.

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In this final report, we have extended our analysis beyond the PCA. Our analysis confirms our view that the PCA is an important source of competitive advantage for major banks. PCAs bring cheap funding from customer deposits and additional revenues from overdraft fees and other charges:

  • Many customers have been with their PCA provider for many years despite better deals being available. Many customers including those with so-called ‘free-if-in-credit’ accounts receive little or no interest on balances and pay high overdraft charges.
  • Many PCA customers also hold instant access savings with their PCA provider, paying very low rates of interest.
  • Major banks with large PCA networks have a net advantage even when the costs of providing the PCA and branch network are taken into account.

Major banks also benefit from advantages in lending activities, where they generate higher yields and enjoy relatively low capital requirements. The overall result is that major banks earn higher underlying returns on equity than small retail banks and building societies.