IT costs barrier to new UK banking players

IT costs barrier to new UK banking players

With IT accounting for up to two thirds of start up costs, technology is proving a major barrier to new entrants in the UK retail banking sector, according to the Office of Fair Trading (OFT).

A slew of new players, encouraged by government, are seeking to enter the UK market in the wake of the financial crisis. Metro Bank, the first new high street player for over 100 years, opened its doors recently and Tesco and Virgin are both looking to become full service lenders.

However, in a review based on consultations within the industry, the watchdog warns that these entrants face "significant challenges" in attracting customers and expanding their market share.

The OFT highlights technology as a key concern because entering the market involves "significant IT investment, often in the form of sunk costs, which can account for up to two-thirds of start-up costs".

This heavy layout means it is important for firms to be able to grow quickly, to spread those costs over a larger customer base but this is difficult for new players to do because retail customers are reluctant to switch providers.

Metro Bank has responded to the challenge by renting its core banking system from Temenos on a pay-per-transaction deal. Virgin Money has also moved to buy-in a ready-made banking platform with the recent acquisition of Intelligent Managed Services (IMS), the Fiserv-derived platform developed for the now-defunct Ivobank start-up.

Meanwhile, although new entrants are able to access industry-wide payment schemes such as Chaps and Bacs, and information on personal and SME customer risk profiles is widely available, credit risk information about micro-enterprises is limited, which may make it harder for new banks to lend to the smallest firms.

Technology issues notwithstanding, the OFT concludes that there are no insurmountable barriers to new banks, with most prospective entrants able to meet regulatory requirements and source the necessary inputs to offer retail banking services. Attracting customers, however, may prove more difficult.

Clive Maxwell, executive director, goods, services and mergers, OFT, says: "If firms face significant difficulties in entering and competing in the market, incumbents have less incentive to reduce costs, innovate and price competitively. A number of firms have recently entered the market, and more are expected to follow. While we found few barriers to setting up, new firms trying to grow in this market face difficulties due to customers' low levels of switching, loyalty to incumbent providers, and attachment to a local branch."

Read the review here:Download the document now 1.8 mb (PDF File)

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