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Study notes

Challenger Banks (Financial Economics)

  • Levels: A Level
  • Exam boards: AQA, Edexcel, OCR, IB, Eduqas, WJEC

A number of new banks are attempting to establish themselves in the UK financial system and challenge the dominance of the leading UK commercial banks.

Challenger Banks in the UK Financial System

How Challenger Banks are Competing

The dominance of leading high street commercial banks means there are substantial barriers to entry in the market – new banks are competing by:

  1. Keeping their operating costs low
  2. Offering attractive prices (higher interest rates on savings, slightly cheaper loans) … this lowers their profitability
  3. Non-price competition including longer opening hours, online banking apps
  4. Targeting specialist parts of the financial market such as buy-to-let mortgages & specialist corporate lending

TSB was demerged from Lloyds Bank in 2013 TSB and then acquired last year by Spanish bank Sabadell in a £1.7bn takeover.


Examples of challenger banks

Aldermore

  • Aldermore was established in 2009 and is a specialist lender and savings bank. Aldermore specializes in secured lending to SMEs

Handelsbanken

  • It has 207 branches in the UK and provides private and corporate customers with a range of services

Post Office Money

  • Provides credit cards, current accounts, insurance products, mortgages and personal loans through the Post Office Money brand which was launched in 2015. Santander and Bank of Ireland providing payments / systems support

Barriers to Entry into Commercial Banking

Commercial banking in the UK is an oligopoly

In oligopolistic markets, barriers to entry make it harder for new entrants to scale their business and make profits

Entry barriers might include:

  1. Cost of IT systems and the cost of establishing branches
  2. Access to payment systems (e.g. cheque/card clearing)
  3. Established banks have access to cheaper retail deposits from their existing customers
  4. Banks which are viewed by investors as ‘too big to fail’ are seen as lower risk and therefore benefit from lower wholesale funding costs
  5. Customer resistance to changing accounts – including the time and inconvenience – harder to build customer numbers and achieve economies of scale

Mergers and Demergers in the UK Banking Industry

  • 2004, Santander (Spain) bought Abbey National plc.
  • 2007, Northern Rock was taken into state ownership in February 2008, and split into two parts: assets (the so-called ‘bad bank’) and banking (the so-called ‘good bank’), in January 2010. Virgin Money acquired the ‘good bank’ in January 2012 and the assets (the ‘bad bank’) in June 2012.
  • 2008, Santander acquired Alliance & Leicester Building Society and deposits and branches of Bradford & Bingley Building Society
  • 2009, Lloyds TSB acquired HBOS to create LBG
  • 2014, Lloyds Banking Group demerged with TSB bank – bought by Banco de Sabadell (Spain)

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