It is interesting to read about the latest developments in the new Williams & Glyn’s bank that is to be head quartered in Manchester and formed from RBS branches. For all the talk about new challenger banks, even these large spin-offs (TSB part of the Lloyds Bank Group being the other one) are small when considered against the might of the big four whose market share totals around 75% of the UK retail current account market and even more of the business/corporate account market.

Are more going to join the party?

Now that 7 day switching has launched it is expected that Tesco and Virgin will burst into the party after standing outside in the rain for the last 2 years, but how quickly will they join and will they join with new exciting funky products accompanied with party poppers firing in all directions? Or will it be a soft launch of standard current accounts albeit in new sparkling crinkly wrapping paper?

With the newly launched TSB Bank, Williams & Glyn’s, M&S Bank, Tesco Bank and Virgin Money all launching or aiming to launch retail current accounts and at least two of those plus Nationwide launching a SME business banking division, the market is going through its biggest change in decades……………………..or is it?

The fringes of the market are changing. New providers such as Aldermore with residential mortgages and asset finance being one example to Metro being another, providing standard banking products delivered with excellent customer service and extended opening hours. Other providers are using technology to drive into market and include peer to peer lending (Zopla and FundingCircle being examples), managed current accounts (Think Money Group), online payments (Paypal), and prepaid card providers (emoney provider Tuxedo and CashPlus). At the other end of the scale at a “local level”, credit unions are trying to muscle into the market by providing niche products and recently one credit union, London Mutual, is taking on the payday lenders local to them by offering cheap short term loans.

All these providers are being successful but are not on the scale to threaten the established players – not yet anyway.

New fringe products such as payday loans are, in my mind, making more of an impact (albeit a contentious one) within UK financial services. For all the headlines they have generated over the last 5 years, all they are doing is providing easy credit to the masses in lieu of credit cards, overdrafts, personal loans and in some cases remortgages which have seen credit criteria for these traditional products tighten to an extent that people cannot and do not easily qualify for them at present. This has driven the popularity of payday loans.

After a period of tight underwriting, availability of credit from traditional lenders (mortgages, personal loans, credit cards and overdrafts) is starting to ease, albeit cautiously, but as with previous recoveries we will see increased competition for customers force the easing of underwriting criteria further and further. We are starting to see this happening with the reduction in mortgage deposit requirements as lenders gain confidence in the housing market. This will feed through to other types of credit as the recovery gathers pace rippling out from London and South East as it did last time.

But maybe things are different this time around?

The fact that the overall lending has reduced (BBA Statistics August 2013) since 2010 and is only now showing signs of tentative growth suggests for the time being a new paradigm of reverence within UK personal finance as the realisation that easy credit has to stop somewhere and the need to reduce debt moves higher up the to do list of the average UK consumer. Although the expectation is that the total amount borrowed (secured and unsecured) in the UK will rise it will be interesting to see if this last downturn has fundamentally shifted people’s views of borrowing and if indeed there is a new social feeling to avoid debt as much as possible.

So is it the right time for new entrants to thrive?

Yes and no………….UK Savings/deposits seem stagnant with low interest rate yields and with fewer people saving for the future it does not bode well for new entrants. As competition increases, margins are thinning, in fact with the FCA wanting to ensure they have put their stamp on financial companies in the form of increased compliance it is suddenly looking less of an appetising market.

Even if the new entrants have been given leeway in the amount of capital they have to hold compared with the existing established banks it is still a massively risky operation to launch a new bank in the UK and because of this it is expected that the existing players will hold onto dominant market share for years to come. Don’t forget the existing big four have been harvesting their existing customers for years and if they suddenly switch into customer acquisition mode together with aggressively retaining customers (both retail and business) the market will become extremely hard and costly for the newcomers, even those that operate solely through the web!

In fact, will Tesco and Virgin Money postpone their entry into the UK market and wait for more profitable times………we will see?

Whatever happens the next four years will be extremely interesting and I feel that the UK banking market has to step up a gear for both the players and its customers. The question is will both of them like the changes and ultimately the result?