In the U.K. banking market, there are plenty of new faces in town: the “challenger banks.”
Over the past seven or so years, since the global financial crisis and through increased encouragement from Europe, there has been an influx of firms applying for banking licenses in order to launch retail banks in the U.K., and no wonder. Competition, monetary and policy incentives, customer demand, margin and yield pressures plus innovative technology enhancements have all fueled the increased appetite for banking services. Firms looking to launch banks are faced by daunting challenges, starting with the regulatory approval process of sustainable business models.
In addition, other challenges include investor appetite, a demanding customer base, human resource factors and system selection. Recent launches have differed hugely, ranging from private equity, non-bank financial institution (NBFI) investment and EC-driven mandates. Business models are also diverse, ranging among branch, digital and hybrid delivery channels. The trend is set to continue, with equal numbers annually submitting bank license applications, making the U.K. financial market attractive to investors and, under current regulatory supervision, a heightened risk sensitive community.
Since the launch of the first “challengers” and their subsequent success, it would appear that launching a bank is now not such a big issue; business model – check, staff – check, systems – check, signed certificate – check. After all, the regulatory application process has been revised to target a smoother launch path. Investors are given the ease of access, proof of success and risk-based governance. Systems and technology are adapting to provide a service (SaaS/cloud) and meet continued demands for lower technology costs. In essence, and as expected, the landscape appears to be improving in order to reduce overall costs and increase success rates in launching banks.
Insights show a welcomed appetite to introducing banking competition: a recent KPMG report, The game changers (May 2015), notes “five challenger banks listed on the London Stock Exchange in 2014, raising over £350 million of new capital to fund growth and strengthen balance sheets. In the group categorized as ‘smaller challengers’, return on equity (RoE) reached a staggering 18.2 percent in 2014, which contrasts starkly with a market where single digit – or even negative – RoEs are the norm.”Banking licenses will not be granted to firms that do not show a robust approach to technology, systems and controls; this is clear. Key areas of consideration include:
The good news for all is that competition will intensify.
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