The changing environment and activities of the uk retail banks

The analysis of the activities and of the summary balance sheet of the retail banks provides an overview of what the banks currently do, but not of how this has changed over time and is likely to change in the future. This section provides a brief overview of the way in which the environment, and hence the activities, of the retail banks has changed in recent years.

Competition

The major change in the environment within which the retail banks operate is that it has become much more competitive. This has come about not only as a consequence of deregulation within financial markets, but also as a consequence of innovation by participants within those markets. The result of this has been that the domination of the market for banking services by the retail banks in the UK has come under attack. With regard to the market for personal customers, a major source of increased competition has been the building societies which, mainly as a consequence of the changes brought about by the Building Societies Act 1986, have started to offer a much more comprehensive range of banking services including, on a limited basis, personal loans for purposes other than house purchase. It has also been suggested that the general public is now much more financially sophisticated than say, 10 years ago, so that they are better able to evaluate alternative financial products and are more willing to move funds between different financial institutions to lake advantage of better interest rates or other facilities.

Personal customers

The ability of the retail banks to attract funds from their personal customers was seen to be under threat, and they have responded in a number of ways:

• Instead of offering just the one type of savings account, the 7-day deposit account, a range of savings accounts with competitive interest rates are now offered with, often, improved access to the funds by the customer.

• Improved current account facilities, in the form of interest-bearing cur­rent accounts, free banking subject to certain (more generous) criteria, facilities such as automatic overdrafts, and the provision of debit cards.

• Improved the access to current account funds, by means of automated teller machines, longer opening hours and home banking facilities.

• Expanded advertising and marketing to increase customer awareness and to improve the image of the retail banks.

• Purchases of building societies by some banks: Lloyds bought Chelten­ham & Gloucester; Abbey National bought National & Provincial and the Bank of Ireland intends to buy Bristol & West.

• Merger - in the autumn of 1996, Lloyds Bank announced its purchase of TSB Bank and they intend to merge the two businesses in perhaps 1998; meanwhile the separate branch networks continue.

Corporate customers

In the market for corporate customers, the changing environment has also manifested itself primarily in the form of increased competition, brought about again by deregulation. The deregulation of the capital markets has enabled corporate borrowers to raise funds from sources other than banks, while in­creased competition has extended the range of alternative means of finance available from the capital market and has lowered the cost of such finance relative to bank finance.

The response by the retail banks to the increased competition for corporate customers has taken a number of forms:

• Improvement of existing facilities for corporate customers. Given that the cost of funds lies largely outside a bank's control, however, their ability to improve existing facilities is necessarily limited and is concentrated on increasing the flexibility offered to such customers.

• Greater involvement in the securities markets. For some retail banks this has meant acquiring firms operating as brokers or market-makers within the capital markets, but they have also become increasingly involved in merchant and investment banking via their subsidiaries and directly in­volved in, for example, managing issues of commercial paper.

• Development of particular segments of the market for corporate custom­ers, and in this respect small- and medium-sized businesses have become the focus of attention, since the ability of such businesses to take advan­tage of deregulation and increased competition within the capital market is limited by their size.

For both the market for personal customers and that for corporate customers. an additional response to the changing environment has been a movement away from their financial intermediary services towards the whole range of non-intermediary financial services. These activities do nut require the banks to obtain and then onlend funds, allowing the banks to benefit from the interest margin: rather, they generate lees or commissions for the bank con­cerned and to some extent are subject to less competition. Many of these activities enable the banks to make more intensive use of their branch net­works and hence to lower average costs. They include insurance broking, unit trust operations, stockbroking and estate agency operations. They are sometimes called 'non-funds based products'.

1. Examine the importance of the Building Societies Act 1986 for UK retail banks.

2. It is sometimes suggested that the general public have become more sophisti­cated in their financial requirements. How might this fact have affected retail banking operations?

3. Discuss some of the improvements which retail banks have made to their facilities in recent years in order lo enhance their position in attracting personal customers.

4. List some of the ways in which retail banks have attempted to improve their facilities for corporate customers in recent years.

5. For what reasons might retail banks move into the provision of non-intermedia­tion financial services?