UPDATE 2-Innovation is slowly prising open UK banking, regulator says

(Adds banking industry body reaction, link to report)

By Huw Jones

LONDON, Jan 20 (Reuters) - Innovation is finally weakening
the market grip of Britain's "Big Four" banks, but "challenger"
lenders are finding it slow and expensive to build up market
share, the Financial Conduct Authority said on Thursday.

High street banking has long been dominated by HSBC,
Barclays, Lloyds and NatWest, prompting Britain to make it
easier for new banks to enter the market, and for customers to
switch banks with little fuss.

"There are signs that some of the historic advantages of
large banks may be starting to weaken through innovation and
digitisation and changing consumer behaviour," the FCA said in
an update of its strategic review https://www.fca.org.uk/publication/multi-firm-reviews/strategic-review-retail-banking-business-models-final-report-2022.pdf
of retail banking business models.

But building market share has been an "expensive and slow
process" for new banks and mid-tier lenders like Santander and
Nationwide, though those based purely online such as Starling
and Monzo are making progress with around 8% of personal
customer accounts, the FCA said.

"Despite this, traditional challengers have provided
additional choice and value for those consumers that have opened
accounts with these challengers," the FCA said in its update of
a 2018 report.

But customer inertia is acting as a barrier to expansion
among challengers, and the Big Four banks continue to achieve
higher returns on capital, a key measure of profitability, than
most other banks, but the gap has narrowed, it added.

Purely digital challengers don’t appeal to everyone and are
likely to co-exist alongside other business models for the
foreseeable future, the review said.

Banking industry body UK Finance said the review showed that
customers are benefitting from a competitive retail market
giving them a much better incentive to shop around.

"Nearly 90% of UK adults now use online, mobile or telephone
banking services, but as the FCA highlights, technology is not
for everyone, so the industry has set out commitments to ensure
there is access to cash and banking services both now and in the
future," UK Finance said.

Competition in the mortgage market has intensified following
the introducing of requirements on banks to "ring-fence" their
retail deposits with extra capital, it said.

Critics say liquidity 'trapped' inside the fence is being
use to offer cheap mortgages, increasing the Big Four's market
share.

"Smaller banks and building societies have struggled to
compete with larger firms in the low-risk lending segment. Some
have exited altogether; others have sought yields in other
segments, including higher risk areas of the market," the FCA
said.

A government-sponsored review https://rfpt.independent-review.uk/news/rfpt-review-interim-statement
of ring-fencing said in an interim report on Wednesday the
rules have not damaged competition in home loans.

(Reporting by Huw Jones; editing by Jason Neely, William
Maclean)