Commercial Banking industry in the UK creating 1 in every 14 jobs

The commercial banking in UK is highly dependent upon the macroeconomic factors. Specifically, quality of consumer credit and core base rates essential factors. In the medium-term a steady economic revival and a slow improvement in credit quality are most likely.

  • Definition / Scope
  • Market Overview
  • Top Market Opportunities
  • Market Trends
  • Industry Challenges
  • Technology Trends
  • Regulatory Trends
  • Other Key Market Trends
  • Market Size and Forecast
  • Market Outlook
  • Technology Roadmap
  • Distribution Chain Analysis
  • Competitive Landscape
  • Competitive Factors
  • Key Market Players
  • Strategic Conclusion
  • References
  • Appendix

Definition / Scope

As of 2017 alone, industry jobs growth in different regions of the country has overtaken that of London (5%), including in the North West (14%), East of England (7%) and Scotland (7%).

  • UK is the largest financial hub in the world and an advantage to the country in terms of economy as the contribution by this sector is significant.
  • The contribution figure was estimated at 174 billion euros 2016 with 2.3 million jobs created by the sector that too excluding London.
  • One of every 14 jobs in Britain belongs to financial and professional related services.

This fact states that the growth and contribution of the industry within the country is to stay for longer time.

The commercial banking in UK is highly dependent upon the macroeconomic factors. Specifically, quality of consumer credit and core base rates essential factors. In the medium-term a steady economic revival and a slow improvement in credit quality are most likely.

Similarly, medium-term interest rises are expected to open doors to current account and savings profitability, which have been worn out since the financial crisis.Thus the overall scope of the industry looks promising.

Market Overview

The UK commercial banking industry is currently at a verge to transform. It is not only challenged by most record regulatory pressures ever in the history but also with the requirement of innovative digital technologies and intensively growing competition from non-bank players.

However, the industry is quite profitable, to be specific most attractive comparatively to other markets in EU region. The core returns in the commercial banks of UK is high and stable comparing to other countries and also in standard of other industries within the financial sector. Most of the retail banks in UK are providing up to 20% return on equity. Regarding the retention of consumers, the retail banks in UK have a consumers highly committed to their services.

As per survey conducted among consumers of commercial banks 57% stated that they have been staying with their main bank for more than 11 years. However, digitization and technology use by non-bank players to cater to consumer needs efficiently has also drawn people to opt for banking related services but trust is the issue as people in UK trust banks more than the upcoming non-bank firms.

In the UK banking landscape, products such as savings, cards and loans are expected to become digital products by 2020. The sales through digital channel of these products are going to reach levels up to 50%. However, current account and mortgages are going to remain as face to face products. Also the profit potential and regulation is increasing competition within the sector.

For instance, growth of supermarket banks, fin-tech and specialty banks has led to significant increase in competition. Another trend is that the senior executives of UK’s retail banks are being continuously replaced by new teams and leaders looking to initiate change in the business models which is focused on digital drive and cost management.

Top Market Opportunities

Since, the commercial banking sector of UK is facing number of problems like regulatory compliance costs, IT transformation, splitting of the division of investment banking from retail etc. In amidst all these, robotic process automation & artificial intelligence are the new trends that could save costs and increase efficiency of the banks. The robotic automation is being researched and banks are looking forward to invest in this technology.

This technology will have cognitive abilities but does require a person to input instructions into it. The technology will have features such as having conversations with customers in form of chat bots.

The new workforce will also be trained to operate these artificial intelligence tools and banks have huge opportunity to gain competitive advantage by leveraging into these technologies which will also make the banking products unique and help provide personalized solution to customers.

The term open banking is becoming popular more than ever among banks in UK. This new banking environment is expected to lower barriers to entry and also strengthen the distribution of financial services among the people. At present, 79% of the banking institutions regard open banking as an opportunity and 68% are already in a readiness stage to invest in 68% in an API platform.

The opportunity is huge as the banks cannot neglect this trend or else they could be easily sidelined from the competition. The trend is also likely to bring opportunities of providing banking services without the traditional brick and mortar system of operation. It also creates other opportunities such it helps to tackle competition coming from non-banking entities and also enter into the arena of non-banking services.

Market Trends

At present there are several factors that has contributed in driving the commercial banking sector to a more positive stance and these are:

  • The most important factor is the ongoing Brexit negotiations between Westminister and Brussels. Previously, there was a lack clarity on the final status of UK-EU relations, especially regarding the free movement of capital which is also one of EU’s so-called “four freedoms” is creating uncertainty for the sector in terms of regulations (licensing, tax base) and future investment priorities (locations, personnel). However, the negotiations is likely bring forth positive news for the sector in future.
  • The economic growth of UK is continuously relaxing which is imposing UK consumers spend less on credit, mortgages and investments. Although GDP was recorded low in the first quarter of 2018 the mortgage applications and consumer credit remained sustained in the second quarter. The number of mortgagees applied for real estate purchases also increased over market expectations. This happened mainly due to weaker household consumption ad fixed investments.
  • Improvement in economic conditions is seen as a major standard for potential tightening of UK’s monetary policy. A tighter monetary policy would usually mean improved profitability figures for private banks as these are translated into improved Net Interest Margins (NIMs), the difference between the interest the bank receives from lending money and the interest it pays on deposits. Due to their size, large UK retail banks are enjoying the benefits of a “low deposits beta”, where higher interest rates charged on loans raise the revenues lead but the cost of funds remain low as for customer deposits

As per a survey conducted among the traditional banks involved directly in retail banking space in UK, the biggest barriers for these institutions to prosper was regulatory requirements followed by consumer dissatisfaction and competition. Other barriers included lack of cyber security and proper data management. The regulatory compliance are vital for strengthening the entire sector.

However, the customer dissatisfaction and competition are more important issues that has to be solved and they can be resolved by technological adoption for creating seamless experience for customers and collaboration model to beat competition but there are obstacles existing in this path as well and they are:

  1. Barriers to collaborate with Fin tech firms: Most of the banks in UK perceive fin tech as a non-threat which is the main reason they find collaborating with such firms as irreverent. However, these companies are becoming popular among consumers so much so that these firms are likely to foray into banking sector in near future and to mitigate such scenario banks are considering fin tech as their ally rather than rival. Nevertheless, there are number of reason such as difficulty in regulatory compliance and lack of procurement and integration mechanisms which has discouraged banks to opt for collaboration with such firms.
  2. Barriers to transform into digital bank: These changes consist of both back-office and front-end. The core system of banking has to convert to digital which includes consolidated data-sets, real time insights, increased flexibility etc. Some of the biggest barriers to adopt digital strategy are possibly legacy systems where these system has strong foundation in banking and cannot be changed easily.

Industry Challenges

The commercial banking industry in UK at present has transitioned into a new landscape where there are number of emerging players such as fin-tech companies offering banking related services, payment operators, digitally led banks, supermarket banks and specialty.

These new non-banking players are emerging and becoming highly competitive, they are active and could further extend their services into retail banking. The risk is that the new challenger banks may take the market share from the traditional banks. As of 2015, the total profits of these emerging players in the industry was recorded at 194 million euros and the big five banks saw a drop of 5.6 billion euros. 

These new players have a number of competitive advantage for instance, they are more customer-centric, and they have agile approach to technology and are creative minded. Commercial banks have the challenge to build a new business model whereby they can usher their investments into technology and unique value offering to consumers. The physical branch networks of the banks are number one cause for the recurring costs every year.

Thus, a leading economic research agency predicts that the costs need to reduce as much as 30-40% if the banks desire to stay in competition. The approach they need to adopt is a lean structure and drive efficiency through use of advance technologies and data analytics. Thus, the biggest challenge for the traditional commercial banks is to sustain their market position and re-establish their value proposition in the mind of consumers.

Technology Trends

Some of the technology trends that is reshaping the commercial banking industry of UK are follows:

  • HSBC has recently introduced a new mobile banking app. The new app offers good utility value including the ability to add new payees, and a 70% less time required to login.
  • TSB introduced iris recognition on its mobile banking. Customers who own Samsung Galaxy S8 or S8+ smartphone will be able to unlock their banking app using the Samsung Pass iris scanner. This reduces lengthy personal documents and passwords to access online banking service
  • Santander has become the first bank in the UK to allow customers to pay through the use of their voice. The bank has updated its Smart Bank app so that subscribers can use voice instructions to check their balance and also sanction payments.
  • NatWest is hiring people who can be directed towards customer service. It is hiring about 1,000 technology experts to aid customers use online and mobile banking in branches.
  • Clydesdale Bank opened a new customer-banking Centre in Edinburgh. This Centre includes a boardroom which business customers can use free of charge as well as break-out meeting areas with complimentary refreshments. The new branch offers free Wi-Fi, and structures digital screens providing live product information.
  • Royal Bank of Scotland and NatWest has collaborated up with US based Rocket Space to initiate a Fin-tech campus in London. The campus will chance for high-growth tech companies as they grow.
  • Barclays opened Europe’s largest co-working space for financial technologies. The space comprises of 30,000 sq. ft. space on Luke Street and it is aimed to invite a range of Fin-tech start-ups along with the bank’s corporate clients and to create new financial services.
  • Royal Bank of Scotland launched Scotland’s first Fin-tech hub. The specialist hub aims to integrate together industry leaders and networks and this is a scheme to build, grow and scale businesses.
  • Citi has also opted MasterCard’s artificial intelligence tool to challenge fraud. The artificial intelligence tool, known as Decision Intelligence will be enable to protect customers from fraud in the UK.
  • Citigroup is employing for a ‘smart automation Centre’. The bank is hiring staff in London, as well as Tampa, Singapore, New York and Budapest. Positions have criteria that require varying levels of technology skills; however, they are looking for people that are tactical. The Centre will develop and install robotic technology throughout the bank.
  • NatWest steered artificial intelligence compliance technology. It has opted for this technology solution to improve and monitor the quality of information and information provided during planned customer conversations. The technology records face-to-face and telephone conversations and stores them in a protected space.
  • Royal Bank of Scotland has announced plans to launch its first artificial intelligence chat bot called ‘Luvo’, among its customers. The platform will assist in analyzing unstructured data − to power its service, which will be able to answer specific customer questions, such as ‘how do I authorize my card to be used overseas?’, whereas questions that are more multifaceted will be redirected to a human who can answer them.
  • Royal Bank of Scotland to shut 158 UK branches. The bank mentioned that the more customers opting to transact digitally being the reason for the closings, leading branches to become technologically equipped and shift from basic operations of past.
  • Santander UK opened the first of its newly designed customer-centric branches in London. The branches will offer state-of-the-art digital facilities, and place the customer at the Centre. Some of the core facilities comprise online banking via new digital workstations.
  • NatWest launched a digital Centre of excellence at Bristol. The jobs based in this Centre are almost related to digital and technology related services such as software engineers, test analysts, solution designers and business analysts. The new online banking solution will serve over 100,000 of the bank’s consumer and corporate customers.

Regulatory Trends

The year 2018 is important in terms of the arrival of multiple regulatory requirements regarding the banking sector in UK. These regulatory requirements has been imposed for the purpose of increasing transparency in business and reinforce consumer protection.

  • MFID II which was revised in January 2018 will be implemented by January 2019 where the compliance of this requirement will be huge challenge to the banks. It is also widely viewed as major legislation which will fundamentally reshape European financial markets. In UK it is expected to improve the operations of financial markets and strengthen investor protection by bringing transparency in business, research and innovations, product governance requirement. 
  • PSDII also known as the revised EU Payment Services Directive II has come into effect in the UK on 13 January 2018. This will replace the older version which was introduced in 2009.This will ensure continuity, consistency and a payment services regime that remains personalized for the UK payments market. The requirements include strong customer authentication and also customer accounts are to be strictly observed. These criteria will allow the PSP’s to receive trust from the consumers in the similar manner where banks have been receiving.
  • Open banking It is a banking initiative was introduced along with PSD2. Its goal is to make it both relaxed and safer for consumers to make cross-country EU payments, requiring EU member states to adopt laws and national policies that go into line with it.The initiative has three key mechanisms. First, it aims to allow consumers to authorize the sharing of their personal data with third-party vendors. Second, it looks to enable those third parties to perform payment transactions such as bank transfer. Lastly, it requires banks to publicly share product and customer satisfaction information, leading investment in product innovation.
  • IFRS9:The banks will have to make provisions in multiple economic scenarios while shifting from an “incurred loss” to an “expected loss” model. Already half of UK banks have to raise provisions for bad loans by as much as 25%. Banks that are more involved in retail operations are exposed to more pressure than wholesale banks because of the need to provision at the upper end of credit limits for each individual credit card.

Other Key Market Trends

The open banking is the new term within the banking arena in UK and in the entire European region. The mechanism allows the banks to open up the way to new products and services that will assist customers and SMEs to get better deals. It is just a means whereby consumer can make most of the financial products where banks also fall under the scope.

The financial products within the European region can be accessed and chosen through cross-country operations however complying with the rules and regulations of the particular country. This new trend within the banking sector is expected to bring forth competition and expose consumers to wide range of products to choose from. It will facilitate direct payments, online access of various banking related services, e-shopping through banking channel and overall the open banking revolution will change the world of finance and money.

Market Outlook

  • The introduction of open banking by next year is likely to come into force by 2019 and this new program is likely to be complex and costly for the industry. The other regulations that have been imposed upon the industry are IFRS 9 update, MIFID2 and GDPR. As the history of UK banking sector is well known to have faced the regulatory challenges, the new requirements with a august 2019 deadline is surely putting lots of pressure upon the banks. Thus 2018 is a year that is a record year for implementation of banking regulations.
  • 2018 has also been the start of innovation and technology penetration which is a positive outlook for the future of the industry. The transformation of banking is on its peak due to technology becoming heart of the industry. The UK’s financial & professional services industry and most particularly retail banks are stepping into digital structure that will bring them back into competition and change the entire competitive scenery of retail banking. Another trend open banking is bringing forth the technological revolution within the sector and increasing investments of the traditional banks into emerging technologies like AI, advanced analytics, Cloud, and machine learning will not only help banks to meet their strategic goals but also commence innovation within the sector.

Thus, the balance between the regulatory implementation and technological change is going to transform the entire landscape of retail banking in UK.

Technology Roadmap

Besides regulatory changes IT is another significant factor for transformation of the banking system in the retail banks of UK. The major IT spending priorities have been set by banks to spend in near future.

Among the various technologies, core banking system was given the top priority at 23% followed by investment in internet channels was prioritized by 18% of the banks and the most emphasis was given to API and open banking system adoption which went up to 8% from previous year’s 1%.

Overall, among all the surveyed banks 68% denoted that they has an increased budget allocation for IT investment and the future of retail banking in UK is going to be re-shaped and transformed through this trend.

Distribution Chain Analysis

By 2020 the major services & product distribution channel will be mobile and online banking for the retail banks. In 2015, the mobile banking interactions was recorded at 895 million and by 2020 it is foretasted to reach over 2 billion.

The new digital landscape of the commercial banks in the country is driven by the IT infrastructure and talented resources which can leverage into the new technologies to create seamless services for the consumers of the bank.

The branch networks of the banks are likely to go further down 186 million and it is likely to further increase in long term. The branch is not entirely gone but it will rather transform into a place where it latest technology, information and higher value products of banking will be present. It would also be an crucial channel to connect un-banked areas of the country.

Competitive Factors

Some of the competitive trends that the commercial banking industry of UK is facing at present are follows:

  • Uber has recently launched a credit card in UK by partnering with a leading credit card company Visa.
  • N26 another major global fin tech company is set to launch in UK. The company has also begun its current account with processing company MasterCard
  • Metro Bank which is the new challenger bank in UK has recently reported to have 10% increment in their deposits followed by pre-tax profit which was up by 77%
  • Royal Bank of Scotland has decided to cut back its IT staff in London by 40%. Besides that it is also preparing to cut nearly 900 IT jobs in London by 2020 and at present it has been outsourcing IT staff in India.
  • HSBC is in the process of locating workers from London to Birmingham. In order to make this happen it is investing £200 million in a new UK base in Centenary Square. Birmingham was chosen particularly because of its strong seamless financial talent workforce, solid transportation links and availability of excellent education and amenities.
  • Barclays to cut 25% of its London office space. The step will save the bank about £35 million a year.
  • Lloyd’s Bank has also declared plans to cut almost 2,000 IT jobs. Almost 2,000 IT workers at Lloyds Banking Group are to have their roles re positioned to IBM and then all but 193 will be outsourced.
  • HSBC is recruiting 500 jobs in Scotland. HSBC’s recruitment drive will include expanding its ‘center of excellence’ for customer contact in Hamilton, South Lanarkshire.
  • Yorkshire Bank opened a new branch in Birmingham. This branch will be unlike others as it will be more like a banking Centre for business customers combined with facilities such as meeting rooms, conference facilities and event space.
  • Metro Bank opened a fusion branch in Birmingham. In addition to the bank itself, there will be training amenities for approximately 200 people to serve planned future openings elsewhere in other regions of the country.
  • Lloyds announced 100 branch closures as it cuts 325 jobs. The bank is focused towards more of a micro branched where it is operated by only 2 people. The micro setup, exhibited on an existing branch in Paternoster Square in the City of London, will use only slight as 1,000 sq. ft. of space.
  • Barclays has targeted to create 2,000 technology jobs in the UK. It is leveling to create 2,000 technology jobs to form talent pools in the UK. Already half of the designations have already been filled with the rest being hired in the coming three years.
  • HSBC has opened its own subsidiary company which will be responsible to conduct all fintech related services called HSBC Digital has signed a lease for 65,000 sq. ft. of space and it will accommodate 3,000 staff that form the nucleus of a digital group and has a diverse base of talented workforce.
  • HSBC has decided to relocate into a new home to Sheffield. This is a major investment where the new location will comprise of IT services and will be ready by spring of 2019. The building will have its own state-of-art design along with modern amenities and facilities like rooftop terrace, a gym as well as retail components including shops.

Key Market Players

The top commercial banks according to net income and assets in UK are follows:

  1. HSBC Holdings
  2. Barclays UK
  3. Royal Bank of Scotland
  4. Lloyd’s Banking Group
  5. Standard Chartered PLC
  6. Santander UK

Strategic Conclusion

As the commercial banking is one of the most important and evolved industry in UK. The dynamics of the industry is however changing and requires banks to shift from traditional business operating ways to develop an entirely new model to address to these changes.

The changes are for instance, demand for personalized services by the consumers, regulatory requirements are progressing and the most significant change is the technological revolution. Thus, to remain in the competition and drive growth of the industry the players must innovate both product offering and processes, focus on reducing costs and achieve operational efficiency, invest in upcoming technologies and identify customer trends in retail banking.

The future of commercial banking within the country depends upon how fast the banks will realize the need to transition into a new landscape and leverage technology and innovation to make fortunes.




UK- United Kingdom

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