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Challenger Banks – a bigger threat?

Since the crash in 2008, the UK banking market has seen a lot of comment and press around the supposed break-up of the market, and the threat from new challengers. Slowly this momentum has grown, as new entities have joined the fray, and new names appeared. The list of participants is now quite significant.

Whilst commentators have often lumped all of the competing banks into a simplistic good challenger vs. bad incumbent split, the reality of what is actually happening in the market place is been somewhat more complex.

Once you get beyond the labels, it soon becomes evident that a number of the participants are adopting similar and competing strategies.

As you will see from the list below, three in particular stand out in terms of competitor concentrations. In appraising their competitive threat we have looked at both the predominant strategy and individual tactics. We hope you find the analysis useful:

  1. Incumbent divestment: TSB and Williams and Glynn. Directly related to the crash and driven by the EU, these two “new” entrants are self contained banks that have been cleaved off Lloyds and RBS respectively. They have established branch networks and are replicating the IB platforms of each parent. With large physical presences, recognised brands, and filled with bankers they are likely to make inroads into the incumbents’ customers – as long as they are given time as independent entities.
  2. Retail complement:  M&S and Tesco. M&S and Tesco have, by contrast, taken a very specific and targeted approach to banking. Each has focussed on recruiting existing store customers. Whilst M&S has had only limited success to date, Tesco’s huge credit card base and proposed Clubcard incentives certainly place it in a stronger position to start to prise away heavy store users. The entry of other grocers to banking (i.e Sainsbury’s) could make this a very competitive space and not just for grocers.
  3. Branch-focussed: Handelsbanken and Metro Bank. Adopting a traditional and geographic based approach in terms of physical presence and branch opening, each bank has to date only cherry-picked customers out of the mainstream. Handelsbanken are targeting mostly at the top end, whilst Metro are appealing to a broader customer segment, often at the lower end. Whilst they continue in that vein, they are unlikely to become a significant threat to the big four.
  4. Hybrid: Virgin Money. Defining the Virgin Money ultimate competitor threat depends on whether it opts for more bricks and mortar “stores”,  (it is currently building on the limited historical Northern Rock branch network) or moves more to an online and telephone centred proposition. Either way, if they do go for their rumoured customer service led offering this will be more in the First Direct style, operating in a certain niche rather becoming a major threat.
  5. Others:  a number of new entrants have focussed on Loans, SMEs and savings, mostly going for online/phone strategies. Another form of cherry-picking.

What else might happen?

New retail competitors are expected, such as the much publicised all Internet Atom bank. It will be interesting to look at the market again in 12 months to see how it has evolved and changed. Watch this space.

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