The global financial crisis has led to a substantial change in the banking industry. Some of the major high street banks have been nationalised, have received financial support from the Government or have merged resulting in the sector becoming more consolidated and concentrated around a handful of major providers. The OFT anticipates that the extent of barriers to entry, expansion and exit in retail banking will affect how the retail banking market will develop. With new and potential new entrants in other sectors, for example Tesco Bank and Virgin Money, it is hoped that the threat of losing business will spur innovation and create lower prices and higher service levels for customers. The review will look specifically at the extent of barriers affecting personal banking and banking for small and medium enterprises.
The OFT’s review will focus on four key areas. Firstly it will consider how the regulatory requirements impact on new entrants entering the market, in particular, how new and potential entrants meet the requirements to obtain a banking licence and also the necessary capital and liquidity requirements. Secondly the review will consider how access to essential inputs prevents or inhibits new entrants. New entrants often have to rely on existing banks to share credit data and rely on centralised networks for access to payment systems required to provide the necessary services to their customers. Next the review will focus on barriers to achieving scale. Previous reports have highlighted how it is important to banks to establish a successful reputation and develop a branch network, each of which take time and involve high costs. The review will consider how barriers to expansion affect new and potential entrants, especially in the light of increased internet and mobile banking. Finally, the review will look at barriers to exit and, amongst other things, will consider how protection and support for failing institutions can have detrimental effects on the market: the rescue of inefficient institutions preventing their replacement with efficient institutions.
The OFT has invited interested parties to make submissions on this review to email@example.com by 8 July 2010.