Chris Skinner: Competitive Hypocrite

I was defending the fact that there is huge competition in banking yesterday and realised that this makes me a massive, two-faced hypocrite, as I’ve blogged so often to say that there is no competition in banking.

How can I be arguing both sides of the case?

For those who know me, they know that I can easily argue both sides of a case if I want to but, in this case, both cases are true.

How so?

Well, there is little competition in banking because the barriers to entry are so high.  To open a new bank, you need massive amounts of capital and all executive directors to be approved by the regulatory authority after a significant vetting process.

This makes it hard to open a new bank and is the reason why Metro Bank, who opened doors in 2010, was the first new bank in Britain for over a hundred years.

So there is no competition in banking as licences are hard to gain and barriers to entry are too high.

However, once you’re inside the bank network, there is plenty of competition.

The argument yesterday was over the fact that there is no competition in banking as RBS and Halifax are raising interest rates on mortgages, and their poor wee customers have nowhere else to go.

To an extent this may be true.

Customers who got great mortgage deals in the past are finding it harder to switch mortgage providers as loose lending policies have been tightened.

Therefore, Joe Shmo who signed up for a five times salary mortgage on a self-certification of income may be in trouble today.

Most banks are trying to be sympathetic to these folks, but they will probably be stuck with their existing provider for the foreseeable future.

That doesn’t mean there is no competition out there.

Santander entered the UK markets in 2004 with the acquisition of Abbey, and is now the second largest mortgage lender in Britain, with near 18% market share of mortgage lending.

Interestingly, like RBS and Halifax, Santander is only increasing rates due to inter-bank lending rates via LIBOR being higher.  Unlike RBS and Halifax, Santander is not increasing rates for existing borrowers but only new borrowers though.

This shows that there is competition, but it’s rates-based.

In fact, most industry competitiveness is based upon interbank competition using interest rate churn to attract new customer.

That’s because most interbank competition is between banks, rather than new entrants with new business models for the reasons given upfront.

Hmmm … and now, thanks to Vickers and other changes afoot, there are new entrants with new business models.

I mentioned Metro, who is now on their tenth branch opening.

There’s Virgin Money, who are also rapidly rebranding Northern Rock’s “good bank” in their own style and with a promise to overhaul the bank models.

There’s Co-operative Bank, expanding its footprint by 632 branches thanks to the purchase of Lloyds Bank’s overflow business that had to be sold under EU competitiveness rules.

There is competition in banking.

It’s just not particularly innovative competition.

But there are also other entrants who have shaken up the fringes of banking.

Zopa’s just about to celebrate its seventh birthday – the P2P financing site opened in April           2005 – with impressive growth figures of recent times:

Zopa's total lending:

2011       £ 57.1 million
2010       £48.1 million
2009       £31.3 million
2008       £10.3 million
2007       £6.3 million

In fact, Zopa’s market share is now a good 2% of all retail lending.  Not bad for a start-up new entrant without a banking licence.

We’ve also seen the rise of other new entrants, like payday loan firm Wonga and more.

There’s also massive competition in the credit card markets, and always has been.

And the fact that I can name several firms – HSBC, Barclays, RBS, Lloyds, Santander, Nationwide, Co-operative, Yorkshire, Clydesdale, Virgin, Metro, Zopa, Wonga and more – as a competitors in the UK retail finance markets means that there is competition.

So we may not like the fact that it’s hard to compete in banking, but to say there is no competition at all is a misnomer.

It’s just that the competition is not as easy as in other industries.

But then that’s not true either.

Trying to break into other industries as a new entrant isn’t easy.

It took Apple three decades to break Microsoft’s stranglehold of the operating systems markets, and they still haven’t achieved a true break of that monopoly.

No-one appears to be able to assail Google’s dominance of search, even Microsoft with Bing has failed in that space.

There may be several airlines in the UK – BMI, Virgin, Ryanair and Easyjet  - but British Airways still has a dominance that is hard to break.

In the car manufacturing space, Britain no longer has any players and each car category is pretty well dominated by a few players.

Even Virgin failed to break the soft drinks market where Coca-Cola is still the out-and-out #1.

All in all, I feel my original commentary about zero competition in banking is fair but untrue.

There is competition in banking.

It’s just very restricted, focused upon interest rate churn, organised as an industry movement that ensures all firms operate the same way, and makes it hard for any start-up to gain any foothold.

Sounds like most markets if you ask me.