2012: Trends to Watch in UK Retail Banking

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2012: Trends to Watch in UK Retail Banking

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This report provides an overview of the most significant banking developments of 2011 and identifies 10 of the most important trends that will shape the retail banking market in 2012, to which providers will need to respond and adapt.

2011 was an eventful year, with banks having to deal with the prospect of tougher regulation, the challenge posed by new entrants, and a stagnating mortgage market. 2012 will be just as fascinating, with lending set to come under further pressure and mobile banking predicted to become a mainstream channel, among other developments.Identifies the most important trends that will affect retail banking in 2012.Assesses the impact of macroeconomic, consumer, strategic, and technological developments on the retail banking industry.Details what actions competitors will undertake in 2012 to protect and improve their market position.There will be a reduction in the supply of credit as borrowing costs rise and interbank lending contracts in the wake of the ongoing eurozone crisis. These factors will combine with tighter capital funding requirements to precipitate further deleveraging, reducing the lending capacity of banks and placing further pressure on the mortgage market.Virgin Money's acquisition of Northern Rock will give it a significant high street presence, and the brand is striving to establish a reputation for honesty and fairness. The Co-operative Bank's planned takeover of the Lloyds Banking Group divestiture give its branch network and share of the current account market a dramatic boost.Mobile will become a mainstream banking channel in 2012, driven by growing smartphone adoption. For many consumers mobile will become their main means of dealing with their bank. Providers will bring out different mobile apps for different consumer segments, and easy-to-use apps will spur the growth of mobile payments.What will be the dominant trends in retail banking in 2012?What impact will macroeconomic, regulatory, and technological developments have on the retail banking sector?How will providers respond to the changing banking environment in 2012?

OVERVIEW

•Catalyst

•Summary

EXECUTIVE SUMMARY

•Trend 1: macroeconomic pressures will lead to a reduction in the supply of credit

- Mortgage lending will fall in 2012

- High loan-to-value mortgages will be particularly badly affected

•Trend 2: UK banks will have to adapt to changing consumer needs in a weak economy

- Consumer demand for borrowing will remain subdued in 2012

•Trend 3: stricter regulation will reduce the freedom of banks to operate

- Three major legislative changes will start to affect the way banks operate in 2012

•Trend 4: Virgin Money and The Co-operative Bank will become a growing threat

- Virgin Money will become a familiar brand in 2012

- An enlarged The Co-operative Bank will provide significant competition for existing high street banks

•Trend 5: providers will have to work hard to attract deposits in a low interest rate environment

- The base rate is predicted to remain at 0.5% until 2014

- Other savings product innovations will be brought out in 2012

•Trend 6: providers will scale back operations in non-core markets

- Banks have already started to withdraw from certain activities and sectors

- Banks will increasingly focus on the lowest-risk consumers

- Banks will rein back on unsecured lending in 2012

•Trend 7: alternative providers will move in to exploit consumer segments that are underserved by mainstream banks

- Non-traditional providers will make greater inroads into lending in 2012

•Trend 8: mobile will become a mainstream delivery channel for banking

- Mobile banking will provide an opportunity for new entrants to differentiate themselves

•Trend 9: banks will find new ways to address the limitations of their legacy IT systems

- Dealing with legacy systems will become increasingly problematic and costly

- Banks will explore alternatives to fully fledged legacy replacement

•Trend 10: use of social media will move from customer engagement to customer participation

- Crowdsourcing initiatives will gain currency in 2012

A REVIEW OF THE MARKET IN 2011

•Regulation and market developments shaped the UK environment in 2011

- The prospect of tighter regulation loomed closer

- New entrants started to establish themselves

- The mortgage market continued to stagnate

•The eurozone crisis continues to threaten the UK financial services industry in 2012

- UK-based providers are very exposed to the continuing crisis facing Europe

- 2011 was a challenging year for the eurozone and developments at the start of 2012 are far from encouraging

- The climate of uncertainty continues in 2012, with fresh doubts about the solvency of Europe

- Dangerously high borrowing costs will continue to challenge governments and private companies alike

- Financial services providers are likely to react by cutting costs and taking other defensive measures

MAJOR TRENDS IN 2012

•Trend 1: macroeconomic pressures will lead to a reduction in the supply of credit

•Financial providers will find it harder to operate in the prevailing climate

- Banks' borrowing costs will rise

- Interbank lending will contract

- Balance sheet assets will come under renewed pressure

- Austerity measures will precipitate more deleveraging

- The forthcoming implementation of Basel III will significantly increase operating costs

- Banks will have to scale back their activities in response to these new conditions

•Mortgage lending will fall in 2012 as a direct result of the need to deleverage

- High loan-to-value mortgages will be particularly badly affected

•Trend 2: UK banks will have to adapt to changing consumer needs in a weak economy

- The UK economic outlook deteriorated over the course of 2011

- Consumer confidence has taken a severe beating over the last two years

- Consumer demand for borrowing will remain subdued in 2012

•Trend 3: stricter regulation will reduce the freedom of banks to operate

- Banks will have to adapt to a new era of much more stringent regulation

•Three major legislative changes will start to affect the way banks operate in 2012

- The forthcoming Financial Conduct Authority will take a more interventionist approach than the FSA

- The MMR will add to restrictions around mortgage lending

- The ICB's recommendations to promote stability and competition will present more challenges

•The future may see even more government intervention in banking

•Trend 4: Virgin Money and The Co-operative Bank will become a growing threat

- Virgin Money will become a familiar brand in 2012

- Virgin Money's marketing will stress the values of honesty, transparency, and heritage

- The Virgin Money instant access savings account offers market-leading terms

- Virgin Money is aiming to create a new branch experience for the UK

- Virgin's record in financial services to date has been mixed

- Charging for current accounts will present Virgin Money with its toughest challenge

•An enlarged The Co-operative Bank will provide significant competition for existing high street banks

- The Co-operative Bank's branch network and market share are set for a dramatic expansion

- The Co-operative Bank will be in a stronger position to leverage its reputation for good customer service

- Execution risks could cause difficulties for The Co-operative Bank in the short term

•Established providers will monitor consumer reaction to new brands before responding

•Trend 5: providers will have to work hard to attract deposits in a low interest rate environment

- The base rate is predicted to remain at 0.5% until 2014

- Providers will respond by offering new incentives for savers

- Other savings product innovations will be brought out in 2012

•Trend 6: providers will scale back operations in non-core markets

•Banks have already started to withdraw from certain activities and sectors

- HSBC will no longer be "the world's local bank"

- RBS is significantly reducing its interests in investment banking

- Bank of America is pulling out of the non-US credit card market

•Increased regulation and funding requirements will force banks to re-examine their lending policies

- Banks will increasingly focus on the lowest-risk consumers

- Banks will rein back on unsecured lending in 2012

•Trend 7: alternative providers will move in to exploit consumer segments that are underserved by mainstream banks

•Non-traditional providers will make greater inroads into lending in 2012

- Payday lenders will enjoy further strong growth in their popularity

- Retailers will provide extra competition in the mortgage market

- P2P lending is a growing area of activity

- Mobile payments and prepaid cards will provide other opportunities for new entrants

•Trend 8: mobile will become a mainstream delivery channel for banking

•Rapidly rising smartphone penetration will drive the growing adoption of mobile banking

- Low consumer awareness of mobile banking options could hold back growth

•Mobile will become the main banking channel for many consumers

- Mobile banking provision will start to move from luxury to necessity

•Mobile banking will provide an opportunity for new entrants to differentiate themselves

- Mobile services will increasingly be segmented by customer type

- Some banks may decide to use mobile to branch out beyond financial services

- Mobile payments will present a significant opportunity for providers to stand out

•Added-value services could ease the path towards introducing charges for day-to-day banking

•Trend 9: banks will find new ways to address the limitations of their legacy IT systems

•Dealing with legacy systems will become increasingly problematic and costly

- New entrants starting with a blank slate have a competitive advantage

- Wholesale migration to new core systems is fraught with risk

- Banks will explore alternatives to fully fledged legacy replacement

•Third party arrangements will allow banks to cost-effectively improve their online capabilities

- Some banks will look to external providers for the provision of added-value services

- Other banks will be happy to provide basic deposit-taking facilities for new start-ups

•Trend 10: use of social media will move from customer engagement to customer participation

- Financial providers will place more emphasis on social media as a tool for reaching out to customers

•Social media will give customers more of a stake in the banking relationship

- The use of social media to achieve goal-oriented savings targets is gaining in popularity

- Crowdsourcing initiatives will gain currency in 2012

- Social media applications that invite user participation will become more widespread

•The major UK banks have yet to enthusiastically embrace social media

APPENDIX

•Supplementary data

•Sources

•Further reading

•Ask the analyst

•Disclaimer

TABLES

•Table: Forecast mortgage gross advances (£m), 2011–16f

•Table: Top instant access savings accounts, January 2012

•Table: The Co-operative Bank's branch network Is set for a dramatic expansion

•Table: Forecast gross advances for payday loans (£m), 2010f–14f

•Table: Yields on government bonds with maturities close to 10 years (%), December 2010–December 2011

•Table: Net percentage balance of lenders reporting that the impact of the cost or availability of funds has improved credit availability (%), Q2 2007–Q4 2011

•Table: Nationwide Consumer Confidence Index, January 2008–December 2011

•Table: Net percentage balance of lenders reporting that demand for credit has increased (%), Q2 2007–Q4 2011

•Table: Market expectations of Bank of England base rate (%), February 2011–November 2011

•Table: Advertising spend by major payday lenders, 2010–11

FIGURES

•Figure: Major macroeconomic events in the eurozone in 2011

•Figure: Several eurozone members saw their long-term borrowing costs rise significantly in 2011

•Figure: Datamonitor's retail banking trends for 2012

•Figure: The falling availability of wholesale funding is leading to a reduction in the supply of credit

•Figure: All sectors of the economy are locked into a pattern of deleveraging and contraction

•Figure: Datamonitor expects gross mortgage advances to fall to £130bn in 2012

•Figure: Consumer confidence has fallen markedly over the last two years

•Figure: Consumer demand for loans started to fall at the end of 2011

•Figure: Gross unsecured lending will see only marginal growth over the next few years

•Figure: Virgin Money has launched a comprehensive media campaign to publicize its new brand

•Figure: Virgin Money lounges will be informal and welcoming in appearance and layout

•Figure: The Co-operative Bank is the highest rated provider in the UK for both service and satisfaction

•Figure: Expectations for the next rise in the base rate have receded into the distance

•Figure: Halifax and Santander have both come up with new ideas to win new savers

•Figure: Banks will face growing challenges from a multitude of emerging rivals

•Figure: Payday lending gross advances are set for strong growth in 2012f–13f

•Figure: Alternative lenders are filling the gap left by traditional providers

•Figure: There was a huge increase in the advertising of payday loans in 2011

•Figure: More than a third of UK consumers now possess a smartphone

•Figure: Applications like Kaching will greatly extend the appeal of mobile payments

•Figure: Modernization of core systems will take second place to upgrading of subsidiary applications

•Figure: Social media is rapidly growing in importance relative to more traditional marketing channels

•Figure: GoalSaver will allow banks to exploit social media for data mining purposes

•Figure: Commonwealth Bank is the latest provider to turn to crowdsourcing

Companies mentioned

ASB Bank Limited, Bank of England, Barclays PLC, Canadian Imperial Bank of Commerce, CMS Energy Corporation, HSBC Finance, Hutchison 3G UK Limited, ING GROEP N.V., Ipsos SA, Metro International S.A., Morgan Stanley, PricewaterhouseCoopers International Limited, Royal Bank of Scotland Group PLC, Schindler Holding Ltd., Shanks Group plc, Umpqua Holdings Corporation, West Bromwich Building Society

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