Office of Fair Trading
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OFT publishes review of barriers to entry in retail banking

New entrants to the retail banking sector face significant challenges in attracting customers and expanding their market shares, an OFT review has found.

The review of barriers to entry, expansion and exit in retail banking, published today, was launched in May 2010 to identify any obstacles blocking firms from entering the sector or from successfully competing against existing firms, as well as factors preventing inefficient firms from exiting the market and being replaced by more efficient ones.

The OFT has established a body of evidence relating to the size and significance of potential barriers, based on extensive consultation with the industry, including established incumbent banks and building societies, new and prospective entrants and consumer and industry groups. A copy of the review will be submitted to the Independent Commission on Banking which is examining issues of competition and stability in the banking market.

The OFT examined four aspects of personal and small and medium-sized enterprise (SME) banking to identify possible barriers: 1. the regulatory process; 2. access to essential inputs necessary to offer retail banking products such as IT systems, payment schemes, information and finance; 3. the ability of new entrants to grow by attracting new customers; 4. issues around exiting the market.

While the review found that most prospective entrants are able to meet regulatory requirements, and source the necessary inputs to offer retail banking services, new providers face difficulties in attracting customers and expanding market share. This is because of the reluctance of personal and small business customers to switch providers, their loyalty to established brands, and preference for banks with a local branch. This was most marked for personal and business current account customers, whereas personal customers were more likely to shop around for loan products.

The other major findings were that:

  • Some firms reported problems around the process of becoming authorised by the FSA to accept deposits, with a lack of transparency and uncertainty causing delays and difficulties in raising funds. The FSA has recently revised its authorisation process and this should lead to greater transparency and certainty.
  • Existing capital requirements may disproportionately affect new entrants and smaller banks by requiring them to hold proportionally more capital than incumbents. As capital and liquidity requirements are updated, it may be appropriate for the prudential regulators to consider and monitor their impact on competition. 
  • 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 makes it all the more important for firms to be able to grow quickly, to spread those costs over a larger customer base. 
  • 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. However, credit risk information about micro-enterprises is limited, which may make it harder for new banks to lend to the smallest firms. 
  • Following the financial crisis, the ability of some firms to expand could be constrained by the current lack of interbank lending. 
  • There is no evidence to suggest that the regulatory framework dealing with how a failing bank exits the sector prevents inefficient firms leaving the market, but the OFT encourages the authorities to give due consideration to competition issues when these arrangements are operated.

The review also explored whether there are specific issues around barriers to entry, expansion and exit in England, Scotland, Northern Ireland and Wales. While the review did not find significant differences in relation to most of the themes covered, it did find that brand loyalty to incumbent national brands in Scotland and Northern Ireland may be greater than elsewhere in the UK and that new entrants' choice of location is largely driven by the size of the potential customer base, with highly populated urban areas seen as more attractive than rural areas.

Clive Maxwell, OFT Executive Director for Goods, Services and Mergers said:

'Vigorous competition in retail banking is vital for personal and small business customers and helps support growth and productivity in the economy. 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.

'We hope that this review will be of value to the Independent Commission on Banking, and contribute to the wider debate on the future of banking.'


  1. The review was launched in May 2010. See press release 55-10 OFT launches review of barriers to entry, expansion and exit in retail banking.
  2. Read the Review page and the Q&As.
  3. Further details on the work of the Independent Commission on Banking can be found at

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