The likes of Tesco and now Boots entering the retail banking space, according to recent reports, may seem a bit leftfield but in fact could pose a real menace to financial institutions. Consumer confidence in financial institutions is already at a low but add to the mix growing competition from trusted, big brand retailers and customers could finally have a reason to switch banking providers. With the benefit of zero toxic debts, companies such as Tesco and Boots also have the advantage of being able to offer more favourable rates, which according to a recent survey by Callataÿ & Wouters, was the number one demand from respondents (46%) seeking improved services from their banks. Certainly, in Tesco’s case, competitive rates have contributed to a doubling of customer deposits in recent months – not a small feat.

The problem for banks is that the lack of liquidity within the sector is currently preventing them from offering better rates and meeting their customers’ needs. However, the growing use of online banking could be the answer to their dilemma. The internet came out on top as the most popular banking channel amongst those surveyed by us, with over two thirds (68%) using online banking to manage their main account. This presents a significant opportunity for financial institutions to not only find alternative sources of funding, through increased access to customer deposits, but also to compete on rates. The direct savings banking model in particular allows customers to be self-directed, meaning banks can minimise overheads whilst passing on better rates to customers. Crucially, competitive rates also attract further funds through interbank lending. However, banks can only offer these rates if they have smaller margins, which is made possible through a cost efficient model.  In a period when liquidity and cost-savings are so important, the internet will prove to be the most reliable channel to retain customers and compete with new and unlikely entrants into the market.