The Current Account Switch Guarantee, which went into effect in the UK last September, gives depositors an easy way to move from one bank to another. With the British economy recovering, loan growth will eventually follow and the new regulation could give smaller banks a way to chisel away at the market share of megacaps that have been through years of cost cutting.
Large banks mostly competing on price, not service: Dickerson
Our analysis of the UK banking market concludes that the Utility Banks will cede four points of market share to the challenger space, opening up a £100bn loan pool with £5bn of revenue potential,” writes Jefferies analyst Joseph Dickerson. “Challengers could nearly quadruple their market share. Sustainable advantage accrues to the NUKE subset with maniacal focus, branches and cheap deposits.”
Large banks operating in the UK (Dickerson includes Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS), Lloyds Banking Group PLC (ADR) (NYSE:LYG) (LON:LLOY), HSBC Holdings plc (ADR) (NYSE:HSBC) (LON:HSBA), Barclays PLC (NYSE:BCS) (LON:BARC); all of which he rates as Hold) control a combined 80% of deposits and 70% of lending, so it’s already difficult for the group to increase its total market share in either area. But after years of cutbacks and a focus on marketing over relationship building, service levels are low and customers are largely unsatisfied. RBS customers are more likely to tell friends and colleagues to steer of the bank than to recommend it, and the other major banks aren’t far behind.
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But smaller banks, what Dickerson calls the (new UK entrants), have a much better ratio of promoters to detractors that they can build on to reach out to other disaffected depositors.
NUKEs should put their branches to work
The problem is that there aren’t that many NUKEs out there, and even though many customers are unhappy at the utility banks, they are leaving their deposits in place either out of inertia or a lack of awareness that other options exist.
To overcome this, Dickerson thinks that challengers like Metro Bank PLC, OneSavings Bank PLC, and TSB Bank need to focus either on specific product categories or regions instead of stretching themselves thin by trying to compete with the utility banks across the board. Mortgage lending in particular puts two of the NUKEs’ clearest strengths to use: people prefer to get their mortgages face to face (either through a branch or an independent financial analyst), and relationship building helps to close deals and bring in referrals.
If they aren’t yet ready to seize the opportunity as loans are still more important than corporate bonds, and lending often lags GDP growth following a balance sheet recession (Dickerson cites Sweden in the early 90s as one example), but the chance to seize £100 billion in market share won’t last forever.