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Viewing report
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Personal Banking Market Assessment 2003
Key Note Publications Ltd, March 2003
Personal banking is no longer a market exclusively occupied by banks. Major insurance companies, such as Prudential (which formed the subsidiary online bank Egg), Norwich Union and Legal and General, have started to compete with high-street banking names for personal loans, savings and mortgages. The supermarkets are also significant competitors - Tesco Personal Finance has over 2 million customers, and Sainsbury's Bank is close behind.
Although consumers are being offered basic banking services from an ever-growing range of providers, the banks have broadened their reach. The major insurers may have attempted to take a slice of the retail banks' profits with their new ventures, but the banks have responded by aggressively entering the insurance market, where they have made considerable inroads. Banks are now engaged in a multitude of markets - in addition to providing current and saving accounts, loans and mortgages, they have developed as investment managers, insurers and pensions providers. They have become much more than just banks - they are financial-services organisations aiming to provide their customer with a one-stop-shop for all their financial needs.
Whether this will continue to be the case, however, remains to be seen. 'Bancassurance', which refers to the provision of insurance alongside other banking services, may have been the strategy of choice until 2002. However, current trends suggest an alternative route. All sectors of the personal banking market are facing margin pressure, due to the large number of competitors. As a response, joint ventures, which exploit the expertise of insurers as product manufacturers and the skills of the banks as distributors - while minimising the risks to both - are likely to rise in prominence.
The personal banking market has been revolutionised by technological developments. Improvements in back-office systems and the effects of the Internet have both broadened and intensified competition, and expanded the scope of retail banking activities.
By radically reducing cost-barriers to entry, the Internet has facilitated the development of a new wave of online institutions able to provide highly-competitive interest rates on deposit balances and loans. These lean, technologically-advanced companies are responsive and innovative in their approach.
However, they are not set to challenge the profitability of the traditional banks. The Internet-bank Egg (79% owned by Prudential) is the only successful new entrant not owned by a banking organisation. The traditional players have responded to developments by investing heavily in their own technology, and research suggests that organisations that can offer multiple distribution channels are most likely to prosper in future. All the major banking groups provide their customers with Internet access to their account information, defusing one of the key selling points of the original Internet banks. This has forced the new entrants to compete on price alone - a strategy that continues to win them new customers, but will ultimately limit their capacity for expansion. For customers without large credit or debit balances, attractive interest rates do not compensate for the convenience of a traditional bank which provides branches, call centres and online services.
Competition has stimulated technological innovation, and has also encouraged banks to reassess their product ranges. Hbos has challenged established approaches to the marketing of current accounts, by offering reduced price holidays and travel insurance to their customers. Integrated bank accounts are being offered by an increasing number of competitors, allowing consumers to reduce the interest payable on their mortgages, by offsetting their current and savings balances against the total borrowed.
The pace of development in the personal banking sector is unlikely to slow. However, it is likely to be affected by a weak international economy, an over-inflated housing market, and an ageing population. Insurers face insolvency as a result of falling stock markets, and of investment decisions made on the basis of inadequate calculations of life expectancy. Any significant rise in unemployment or interest rates threatens the stability of the banking system - the average British consumer now carries a higher level of debt than at any time in history. Analysts predict that the housing market, which has proved so lucrative for mortgage lenders, will not be able to sustain its upward trajectory much beyond 2003.
Personal banking has recently enjoyed a period of profitability, innovation and change. The next years (2003 to 2007), however, could prove to be among the most difficult in the market's history.
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