House of Commons - Competition and choice in retail banking

Competition and choice in retail banking - Treasury Contents

2 The landscape of retail banking in the UK

What is retail banking?

20. The Office of Fair Trading (OFT) has categorised retail banking services into three broad areas:

Core banking services: personal and business current accounts, overdrafts and savings products traditionally associated with banks.
Secondary banking services: unsecured and secured loans to personal and SME customers, including credit cards and mortgages.
Peripheral banking services: such as insurance, pensions, wealth management, hedging, letters of credit and legal services.

The OFT notes that peripheral banking services, are not typically considered as retail banking services.[13] Our focus in this competition and choice inquiry has been on core and secondary banking services.

21. There is no requirement for a retail banking provider to supply both core and secondary banking services to personal and SME customers. Indeed, as the OFT notes, many providers have entered the retail banking market but concentrated on only a sub-set of services and products. The provision of core banking services will typically require authorisation from the Financial Services Authority to accept deposits. The provision of some secondary banking services will require a consumer credit licence from the OFT or authorisation from the FSA.

22. An alternative way to look at the retail market is through type of provider. There are three main types of provider:

Retail banks which predominantly accept deposits and use these funds (together with funding from the wholesale market) to make loans as well as offering other financial products to consumers and firms. Lloyds Banking Group would fall into this category.
Universal banks which not only offer retail services but are also involved in wholesale and investment banking activities. Barclays, HSBC and RBS would fall into this category.
Building societies—mutual institutions whose principal purpose is to accept savings and make loans.

Other types of provider include monoline providers—such as Capital One—which focus on a single product or product line; credit unions, financial co-operatives owned and controlled by their members and offering banking products; and non-traditional financial institutions offering banking products, often through a joint venture or a white label agreement[14] with an established retail banking provider. Finally, it is worth noting that recent years have seen the rise of peer-to-peer facilitators, firms that act as facilitators for matching lenders and borrowers. We discuss the issue of diversity of type of provider in greater detail later in this Report.

23. The choice of distribution channel varies between business models. Channels include the use of a branch network, the internet, telephone, post and intermediaries and other third parties. The internet is a relatively recent distribution channel which is often seen as particularly important as a catalyst for increased competition. However, physical branch facilities remain important—the OFT found that 77% of consumers would not consider using a retail banking provider that had no branches and only operated an internet and telephone service. This figure was lower for savings/investment and loan products.[15] As the market share tables on the following pages show, stand alone internet banks have only limited penetration in most retail markets.

Drivers of consolidation and increased concentration

24. The OFT's Review of barriers to entry, expansion and exit in retail banking concluded that "the financial crisis has had a major impact on retail banking in the UK", outlining that "one very visible effect has been the consolidation of a number of well-known banking brands resulting in greater concentration across the sector", although "the degree of concentration differs in each product market."[16]

25. The main driver of consolidation in the sector has been a significant increase in mergers as well as the exit from the UK market of some overseas operators. Which? noted that since April 2008, there have been 14 mergers. Nine mergers involved mutual building societies. Ten mergers arose because of concerns over capital or losses incurred through the crisis. Of these, the largest by far was the merger of Lloyds TSB and HBOS, which is now the market leader in many sectors of the market.[17]

Table 1: Mergers and Acquisitions in UK Banking (since April 2008)

Year Financial Institution Merged with/ Acquired

2008 Santander Alliance & Leicester

2008 Santander (Abbey) Bradford and Bingley (savings and branches)

2008 ING Direct Heritable
Kaupthing Singer & Friedlander

2008 Chelsea Building Society Catholic Building Society

2008 Nationwide Building Society Cheshire Building Society

2008 Nationwide Building Society Derbyshire Building Society

2008 Lloyds-TSB HboS

2008 Yorkshire Building Society Barnsley Building Society

2009 Co-operative Financial Services Britannia Building Society

2009 Yorkshire Building Society Chelsea Building Society

2009 Nationwide Building Society Dunfermline Building Society

2009 Skipton Building Society Scarborough Building Society

2010 Barclays Standard Life Bank

2010 Coventry Building Society Stroud and Swindon Building Society

Sources: Bank of England (2008). 'Financial Stability Report', Issue 24, pgs 24-25, pub: Bank of England: London. Office of Fair Trading (2010).'Merger Cases', accessed at OFT website http://www.oft.gov.uk/advice_and_resources/resource_base/Mergers_home/Mergers_Cases/

26. Virgin Money contrasted the present state of the UK retail market with that prevailing twenty years ago when "there were many more providers of personal banking services and a much greater variety of providers". They argued that twenty years ago—in addition to the big four—customers could choose as alternatives:

the two Scottish banks (RBS and Bank of Scotland), the unique TSB, the converted bank Abbey National and the about-to-convert Halifax, and a number of building societies with national distribution including Nationwide, Cheltenham & Gloucester, Woolwich, Northern Rock, Alliance & Leicester and Bradford & Bingley. Many of these providers were retail-only, and they competed effectively with the 'Big Four' by offering a different product focus or service proposition, reflecting the priorities of their stakeholders.

They concluded that now, in the UK, there "was no credible alternative to the large banks for full-service banking, except to some extent Nationwide and the UK subsidiaries of National Australia Bank".[18] Others took a different view, pointing to the entry, over the last twenty years, of many current and former building societies into the personal current account and SME markets. They also noted significant entry of providers —often foreign-based—into the savings, mortgages, loans and credit card markets as well as the entry of banks into the mortgage and savings markets over this period.

27. The financial crisis has resulted in significant consolidation of the UK retail market. Well known firms such as HBOS, Alliance & Leicester and Bradford and Bingley have either exited the market or merged with rival firms. A large number of building societies have merged, undermining the diversity of provision in the sector. Whilst these 'rescues' were necessary in order to preserve financial stability, the consequence has been to reduce competition and choice in the market. We examine the Lloyds TSB/HBOS merger as well as diversity of provision and, in particular, the mutual sector in greater detail later in this report.

Market shares and concentration levels in key retail markets

28. Even though there is considerable variation in the number of firms in particular segments of the retail market, there is a high degree of concentration in key parts of the market. The Herfindahl-Hirschmann Index (HHI) is a measure of market concentration that takes account of the differences in the sizes of market participants, as well as their number. It is often used to assess the degree of concentration in a particular market.[19] The recent OFT/Competition Commission (CC) merger guidelines note that a market with an HHI measure exceeding 1,000 could be characterised as 'concentrated' whilst a market with HHI measures exceeding 2,000 could be characterised as 'highly concentrated'.[20]

29. Personal and business current accounts are dominated by the major banks. The five leading banks—Lloyds Banking Group, RBS, HSBC, Barclays and Santander—have an 85% share of the personal current account market. The four largest firms in the business current account market—RBS, Lloyds Banking Group, Barclays and HSBC—have a 78% market share. However, in other parts of the retail market, they appear to face a greater number of competitors. For example, the five leading firms in the unsecured personal loan market account for 64% of the market and in the savings account market the largest five firms account for just 63% of the market.[21] In the following sections we examine in greater detail the market shares of the leading firms as well as the number of other providers in the different segments of the retail market.

PERSONAL CURRENT ACCOUNTS

30. The personal current account is the cornerstone of Britain's retail financial system. Broadly speaking, a personal current account can be defined as an account for individual consumers, which provides the facility to hold deposits, receive and make payments using cheques, debit cards, Direct Debits and standing orders, to use ATMs and to make regular payments. Additionally, PCAs often have overdraft facilities. Datamonitor's most recent estimates suggest that 93% of adults in the UK hold a current account and that there were approximately 71 million accounts in the UK.[22]

31. This market is dominated by the five largest PCA providers—Lloyds Banking Group, RBS, HSBC, Barclays and Santander; Lloyds Banking Group has 30% of the market—almost double the market share of their nearest competitor RBS. When Sir Donald Cruickshank examined competition in UK banking in 1998, the four largest banks—at that time, Lloyds TSB, NatWest, Barclays and HSBC including all subsidiaries[23]—had a 68% market share; the equivalent today is 73%.

32. The Cruickshank report showed an HHI for current accounts of 1,330 for 1998 which was described as "indicating a relatively high level of concentration."[24] Concentration increased even after the Cruickshank report, and has been made even more acute by the post-crisis consolidation described above. The HHI for the personal current account market rose from 1,410 in 2007, to 1,736 in 2010, an increase of 374.[25]

Table 2: PCA market shares pre- and post-financial crisis, by number of customers

Source: OFT, Review of barriers to entry, expansion and exit in retail banking (Table 3.2)

MORTGAGE MARKET

33. The five largest providers—Lloyds Banking Group, Santander, Nationwide Building Society, RBS and HSBC—account for over 75% of gross new lending in the mortgage market.

34. The mortgage market looks less concentrated when examining the existing stock of mortgages held by consumers (outstanding balance), where the five largest providers account for only 63% of the market. However, at the time of the 1998 Cruickshank report the big four banks had only a 17% share of this market when measured by number of mortgages.[26] Even now, 29% of the stock of mortgages is held by banks described by the term 'other' category in the table which includes other banks, building societies and specialist lenders. The large difference in the figures for this group—15% of gross lending market share as opposed to 29% of outstanding balance market share—appears to reflect the lower levels of lending made by specialist mortgage providers following the financial crisis, in part, due to their reduced ability to source mortgages using wholesale finance. The financial crisis has resulted in the disappearance from the market of a significant number of specialist or foreign lenders.[27] Again Lloyds Banking Group is the largest provider in both categories of the mortgage market.

Table 3: Total mortgage market shares, gross lending and outstanding balances, 2009

Mortgage provider Gross lending, market share (%) Outstanding balance, market share (%)

Lloyds Banking Group 24 28

Santander 18 13

Nationwide Building Society 8 10

Royal Bank of Scotland Group 13 7

HSBC 11 5

Barclays/Woolwich 10 7

Others 15 29

Source: OFT, Review of barriers to entry, expansion and exit in retail banking (Table 3.4)

SAVINGS ACCOUNTS

35. There has also been consolidation in the savings account market. The five largest providers—Lloyds Banking Group, Santander, RBS, Barclays and Nationwide—account for 62% of the market rather than the 56% of the market held by the five largest providers in 2006. Lloyds Banking Group once again has the largest presence in this sector of the retail market. There is a larger tail of providers with relatively small market shares in the savings market as compared to the personal current account market, but even so concentration in this market has increased. In 1998, the Cruickshank report noted the HHI was 910.[28] Although concentration reduced for a while, the HHI in the savings account market has risen from 889 in October 2006 to 1,083 in February 2010—an increase of 194.[29]

Table 4: Saving accounts market shares pre-and post-financial crisis, by number of customers

Source: OFT, Review of barriers to entry, expansion and exit in retail banking (Table 3.3)

UNSECURED PERSONAL LOANS

36. The top five providers of unsecured personal loans account for over 60% of this market. Once again Lloyds Banking Group has almost double the market share of its nearest competitor, Barclays.

Table 5: Unsecured personal loan market shares, by number of customers, 2009

Unsecured lending provider Personal loan Sept
2009, market share (%)

Lloyds Banking Group 25

Barclays 13

Santander 10

Royal Bank of Scotland Group 9

HSBC 7

Nationwide Building Society 4

Northern Rock 3

Co-op 1

Other high street bank 2

Other building society 0.5

Direct/specialist loan company 7

Retailer 7

Internet only/direct bank 3

Credit card issuer 0.5

Other 11

Source: OFT, Review of barriers to entry, expansion and exit in retail banking (Table 3.6)

SME MARKET

37. The latest available data (2008) on liquidity management services suggests that four banks account for nearly 80% of the SME market. The OFT states that more recent data following the financial crisis is not available, though it warns that it is likely that the market will have become more concentrated due to recent consolidation in retail banking, in particular the merger of Lloyds TSB with HBOS and Santander with Alliance & Leicester. The HHI in this segment of the market was 1,604 which the OFT/CC guideline notes define as a 'concentrated' market.

Table 6: SME liquidity management services market shares, by number of accounts, 2008

Provider 2008, market share (%)

Royal Bank of Scotland Group 23

Lloyds TSB 19

Barclays 18

HSBC 18

Alliance & Leicester 6

HBOS 4

Clydesdale 3

Co-operative Bank 2

Abbey 1

Others 6

Source: OFT, Review of barriers to entry, expansion and exit in retail banking (Table 3.8)

Conclusions on concentration levels

38. There has been a clear increase in concentration levels in parts of the retail market. Indeed, concentration in many sectors of the market is now higher than when Sir Donald Cruickshank examined competition in retail banking, particularly in the personal current account and SME markets. The five large banks—Lloyds Banking Group, RBS, Barclays, HSBC and Santander—have an overwhelming 85% share of the personal current account market. In 2008 the market for SME liquidity services was dominated by just four firms who shared 80% of the market. Other parts of the retail market such as those for savings products and loans, where the number of participants is larger, are less concentrated.

39. Whilst the level of concentration is just one measure of competition in a market, it is important. Concentrated markets also make it easier for firms to collude by making it easier for competitors to monitor each other. If banks imitate the products and services of their competitors the intensity of competition is reduced and this can lead to a consumer perception that there is no real difference in the products and services of the major banks.

Does increased concentration matter?

40. The large incumbent banks acknowledged that the financial crisis had led to consolidation within the sector and an increase in concentration levels.[30] However, they also claimed that there was no necessary link between concentration and the degree of competition taking place in a particular market and that the UK retail market was not concentrated by international standards or by the standards of other industries.

THE LINK BETWEEN CONCENTRATION AND COMPETITION

41. The large banks argued that whilst concentration had increased this had had little or no bearing on competition in the sector. Barclays noted that whilst there had "been consolidation", "despite these changes, the landscape remains competitive and dynamic with the emergence of new competitors, products and consumer propositions."[31] The large banks also pointed to the emergence of new entrants—such as Metro Bank and Virgin Money—as proof that competition was taking place.[32]

42. Joe Garner, Deputy Chief Executive UK at HSBC addressing the issue of concentration, told us that "there seems to be a perception at times that there are three or four major players; there are at least six major players in the UK market."[33] Eric Daniels, then Group Chief Executive at Lloyds Banking Group, told us that "concentration does not lead to a lack of competition", [34] but at the same time pointed to the large number of firms in certain segments of the retail market as proof that competition was working. For example, Mr Daniels pointed out that there were "60 competitors" in the mortgage market, that the current account market had "about 30" and there were "about 80 competitors in the savings market".[35] He said that "you have a very wide variety of players that are offering different products", describing "the number of mortgage products as absolutely phenomenal", concluding that "customers have real choice"[36] and that this was "an enormously competitive market".[37] This argument was also deployed by Stephen Hester, Chief Executive, RBS, who spoke of "60-odd credit card providers or 80-odd savings providers," concluding there were "obviously plenty of second-tier players in banking."[38]

COMPARISONS WITH OTHER SECTORS

43. Furthermore, Lloyds Banking Group told us that their analysis showed that "the market for banking services is significantly less concentrated than those for utilities, grocery retail, mobile telecommunications, and the fiercely pro-competitive home broadband and pay TV markets."[39] This was a point picked up by Brian Hartzer when he gave evidence. Mr Hartzer referred to the supermarket industry, which he described as more concentrated than banking, but where the competition authorities had "found good consumer outcomes."[40] More broadly, Mr Hartzer was keen to stress the lack of a simple relationship between concentration levels and consumer outcomes, stating that "we see markets in many industries around the world with different levels of concentration and different consumer outcomes"[41] Lloyds Banking Group said utilities, grocery retail and mobile telecommunications are more concentrated than the retail banking sector. However, we note that all the industries highlighted for comparison are either directly regulated (such as utilities) or have themselves been subject to multiple competition inquiries and regulatory interventions (grocery retail, mobile telecommunications, retail broadband and Pay TV).

INTERNATIONAL COMPARISONS

44. Mr Daniels also contrasted the level of concentration in the UK market with overseas:

Mr Daniels said the UK market was a 'contestable' one—"if you have a market where you have several different competitors and there's high concentration but there's high contestability—in other words players will seek to gain share and therefore will fight very hard on service, on advertising, on trying to reach out to customers—that leads to very good customer outcomes."[43] Joe Garner noted that when "we look around the world and we can see markets where there are a greater number of players, they often then tend to be regionalised". He explained that "if you have a greater number of players, but there is only one in your locality, it still has not improved choice."[44] We disagree strongly with the assertion that the UK retail banking market is contestable. A market is contestable if entry and exit barriers are low and whilst this may be the case in certain parts of the retail market, it does not appear to be the case in parts of the personal current account and SME markets. Furthermore, the financial crisis has demonstrated that exit barriers in the UK banking market are anything but low.

HOW COMPETITIVE IS RETAIL BANKING?

45. Others disagreed with the arguments put forward by the large banks, arguing that high levels of concentration combined with the particular dynamics of some parts of the retail market had had a negative impact on competition. John Fingleton, the Chief Executive of the OFT, characterised the banking sector as "concentrated" whilst his colleague Clive Maxwell, Executive Director, OFT, singled out "the personal current account and SME markets as the most concentrated as well as suffering from the highest levels of [consumer] inertia".[45] Mr Fingleton stressed that "we see many concentrated markets where there is very good performance in terms of competition" adding that "concentration is not itself the source of the problem" but that one needed to examine "how the dynamics of the market work." He argued that retail banking:

He concluded that he was "on the side of thinking that the market could be more competitive" again singling out the personal current account and SME markets as particular areas of concern.[47] The particular dynamics of the market singled out by Mr Fingleton and the OFT were the lack of transparency, low levels of switching and strong customer inertia.

46. This was a theme picked up by Benny Higgins, Chief Executive, Tesco Bank, when we questioned him whether the market for current accounts was competitive:

47. We asked the CEO of another growing entrant in the sector, Jayne-Anne Gadhia, Chief Executive, Virgin Money, whether she agreed with comments by Stephen Hester, Eric Daniels and other representatives from the large banks that retail banking in the UK was "enormously competitive". Ms Gadhia disagreed strongly:

48. Ms Gadhia's reference to consumers getting a good deal was also made by Hector Sants, Chief Executive, FSA, who told us that there was "a credible argument to be made that some benefits would accrue from reduced concentration in certain areas."[50] Lord Turner, the Chairman of the FSA, also agreed that "a somewhat wider set of retail banks [...] could be a good thing." [51]

49. The relationship between concentration and competition has been noted by the Independent Commission on Banking who have stated that:

The degree of concentration in a market—for example, as measured by the market shares of the largest firms—is not always a reliable indicator of the degree of competition. Competition can be strong in quite concentrated markets and weak in markets that are not highly concentrated.

Nevertheless the Commission concluded that there was "a tendency, all else equal, for markets to be less competitive when more concentrated".[52]

50. We note the argument of the large banks that there is no necessary link between concentration levels and the degree of effective competition. Indeed, we agree that certain markets are highly competitive whilst on some measures also being highly concentrated. Nevertheless, the bulk of our evidence argued that the banking market was not competitive. Like the Independent Commission on Banking we consider there is "a tendency, all else equal, for markets to be less competitive when more concentrated"; it is legitimate to be concerned about the state of competition in the retail banking sector.

51. We examine the issue of price transparency, low levels and perceived difficulties with switching as well as whether the UK's free-banking system hinders competition in greater detail in the following chapter.

LOW LEVELS OF CUSTOMER SATISFACTION

52. Effective competition should deliver good consumer outcomes. The theme of low levels of customer satisfaction and lack of choice reverberated through the course of our inquiry. Which? has conducted satisfaction surveys of its members for savings, current accounts and mortgage providers in 2008, 2009 and 2010. As Which? noted, the results for these surveys have shown both significant variation across different banks, with new entrant or internet-only banks performing especially well, with continued poor performance by the largest of the high-street banks. For current accounts, their survey results found the main high street banks performing poorly compared to internet banks and many of the smaller or new entrant banks and building societies. Table 7 below summarises their results.

Table 7: Survey on satisfaction results for personal current account brands

Bank 2008 2009 2010

Lloyds Banking Group (a) 59% 55% 49%

(HBoS) 56%

RBS (b) 61% 57% 55%

HSBC 57% 60% 58%

Barclays 53% 55% 53%

Santander (c) 44% 58% 52%

Average 'Big 5' (excluding Santander for 2008) (57%) 57% 53%

Banks achieving 70% or greater satisfaction results

First Direct* 85% 90% 88%

Virgin One - - 88%

Co-operative bank 82% 84% 86%

Smile 88% 91% 85%

Nationwide 79% 79% 72%

First Trust - - 72%

Cahoot* 82% 84% 71%

Intelligent Finance* 72% 74% -

Source: The 2010 Which? Current account survey, Ev 194. Note: * = internet only brands operated by one of the Big 5 banks

53. Which? told us that the main areas of dissatisfaction were the level of interest payments or charges applied to accounts followed by the provision of up to date information on rates and charges. They said some of the Big 5 also performed poorly for provision of internet and phone banking services and resolution of problems whilst customers of the Big 5 were most satisfied with the accuracy and timelines of statements and availability of branches. They recorded similar results for savings and mortgages. Whilst the average satisfaction score amongst the Big 5 for savings accounts was only 47%, First Direct and Co-operative Bank were the only brands to score 70% or higher. The worst performing bank brands were Santander at 39%, followed by Cheltenham & Gloucester, Bank of Scotland and Halifax (all operated by Lloyds Banking Group).

54. With respect to current account provision, Which? recorded that the main areas of dissatisfaction were the level of interest and keeping customer informed on rates and charges. Customer satisfaction in the mortgage market was similar, with the Big 5 scoring an average of 55% satisfaction compared to the best result of 87% (First Direct). The main reported reason for dissatisfaction was lenders failing to pro-actively inform customers when more suitable or better mortgages were available.[53]

55. Which? concluded that "despite the Big 5 banks', at best, average satisfaction ratings they continue to dominate the provision of key retail financial services, emerging as clear winners of the financial crisis." The conclusion they drew was

56. Metro Bank executives agreed. Vernon W Hill II, Vice Chairman, Metro Bank—who was the founder of the US bank Commerce Bank—stressed that "the customer dissatisfaction rates in Britain for banks are at levels I have never seen in America" and that many survey results show British consumers were "very dissatisfied with the British banking system."[55] Mr Hill told us the net promoter score which measured the percentage of a bank's customers who would recommend the bank to a friend minus those who would not. Mr Hill told us that First Direct scored +57%, but that Lloyds Banking Group had a dissatisfaction score of -19% whilst Barclays scored -35%. He also told us that Santander had a "dissatisfaction rate of 67%" and that overall "in Britain 42% of customers are dissatisfied with their banks."[56]

57. Mr Hill was scathing about the major banks, describing them as "essentially offering the same products in the same way" with the customer ending up with very little "choice".[57] His colleague Anthony Thompson, Chairman, Metro Bank, explained that, in contrast, Metro Bank saw themselves as "a retailer." He explained that "the UK [non-banking] retail market was highly competitive, so retailers are open from early in the morning until late at night, they are open seven days a week." As a result Metro Bank was "open from eight until eight Monday to Friday, eight until six Saturday, eleven until four Sunday." He contrasted this with the large banks which were "open from nine until five" concluding that "if there was a competitive market we would see changes in that."[58] 'Choice' was also stressed by Jayne-Anne Gadhia and Adam Phillips, Chairman of the Financial Services Consumer Panel. Ms Gadhia told us that:

Whilst Mr Phillips who described a "small number of large banks" as "resembling an oligopoly," also noted that the large banks had "prices that are very similar, and deliver service that is very similar," concluding that "therefore the consumer had no choice."[60]

58. Competition policy should maximise the benefit to the consumer. Our evidence suggests that this is not happening. The large banks perform poorly on many consumer satisfaction surveys relative to other providers. Survey evidence consistently shows customers are dissatisfied by service quality and the lack of real choice on offer in the marketplace. In a genuinely competitive market we would expect firms which provide superior service, choice or prices to gain significant market share from rival firms, but we see little evidence that this is happening.

LARGE SIZE AND ECONOMIES OF SCALE

59. Economies of scale are the cost advantages that a business obtains due to expansion which cause a producer's average cost per unit to fall as scale is increased. In retail banking these include the need for a branch network, building a trusted brand and access to capital. We received evidence that consumers benefit from the presence of large banks and the accompanying economies of scale. RBS asserted that "larger, more diversified companies have the ability to achieve greater synergies and create economies of scale. This enables banks to provide services at lower cost to the consumer whilst also delivering a sustainable return to investors."[61] However, when pressed on this point, Stephen Hester explained that he did not mean that big banks were the only model that should exist, telling us that:

60. Vernon Hill was dismissive of the arguments deployed by RBS and Mr Hester—he told us that there was "no proof that scale gets you economies of scale" going on to say that:

John Fingleton considered that if a market was "not particularly competitive" then "we would be very sceptical that the incentives are there to exploit those efficiencies" and that even where those efficiencies were exploited "the incentives won't be there to pass them on to the customer." He added that he had:

61. The large banks have told us that ultimately consumers will benefit from lower prices resulting from the economies of scale and synergies provided by larger more diversified banks. We agree that there are economies of scale/minimum efficient scale in retail banking which will ultimately limit the total number of firms in the market. However, we question whether the need for economies of scale justifies banks having a 30% share of the market or whether such benefits, if they exist, will be passed onto consumers in a market where competition is deficient. Indeed, such economies of scale benefits are likely to be outweighed by the negative impact on competition by those providers who are perceived to be 'too big to fail'.

13 OFT, Review of barriers to entry, expansion and exit in retail banking, para 3.3-3.4, p25-26, November 2010 Back

14 A white label product or service is a product or service produced by one company (the producer) that other companies (the marketers) rebrand to make it appear as if they made it. Back

15 OFT, Review of barriers to entry, expansion and exit in retail banking, figure 7.6, p146, November 2010 Back

16 Ibid. Back

17 Ev 199 Back

18 Ev 181 Back

19 The HHI is the sum of the squares of each provider's market share Back

20 CC, OFT, Merger Assessment Guidelines, September 2010 Back

21 OFT, Review of barriers to entry, expansion and exit in retail banking, table 3.2, 3.6, p 35, 48, November 2010 Back

22 Data monitor, Banking on change: UK Current Accounts and Savings in the UK 2010, 2010 Back

23 Competition in UK Banking: A Report to the Chancellor of the Exchequer, by Don Cruickshank, p 104, para 4.8, March 2000 Back

24 Competition in UK Banking: A Report to the Chancellor of the Exchequer, by Don Cruickshank, p 106, para 4.14, March 2000 Back