George Osborne, chancellor of the exchequer, has announced a range of reforms to the UK’s banking system. The reforms include encouraging competition within the sector as well as expediting the cheque-clearing process for retail customers and electrifying the proposed ring-fence between retail and investment banking.
As with other recent announcements, retail banking and investment banking were frequently referenced during the speech – while transaction banking was notable by its absence. But the transaction banking world is poised for a quiet revolution.
The decision to electrify the ring-fence comes in the wake of the report published in December by the Parliamentary Commission on Banking Standards (PCBS). The PCBS report argued that the banking industry could dilute the impact of the ring-fence and that powers should be put in place to enforce the breaking up of banks that do not comply.
Anthony Browne, CEO of the British Bankers’ Association, hit back, stating the proposed reforms “will create uncertainty for investors, making it more difficult for banks to raise capital, which will ultimately mean that banks will have less money to lend to businesses. No other major economy is considering moving away from the universal model of banking because it undermines banks’ ability to provide all the services businesses need.”
While the changes are focusing predominantly on retail banking, they will also have an impact on corporations that deal with consumers and SMEs, and by extension on their banks. But transaction banking is most notable by its absence when it comes to the changes in the pipeline.
“The chancellor’s proposal is, like many recent public announcements, focused around opening up the retail banking market in the UK,” says Nicholas Brewer, senior analyst, Aite Group. “It is in the context of a policy aiming to make the sector more transparent to price competition and more welcoming to new banks in the market.
“Transaction banking is not present in this dialogue, partly because the public debate is still focused around good, socially useful retail banking and bad, speculative investment banking and trading, with transaction banking caught between the two.
"The result of this is that SME-focused banking tends to be caught up in changes intended for retail banking clients, and MNE [multinational enterprise] banking tends to be caught up to some extent in changes intended for trading or investment banking activities.”
As such, the changes discussed by Osborne could bring some benefits for SMEs, which as Brewer points out are “often provided with repackaged retail banking services, differentiated only by fee structures and product names”.
But for transaction banking, the prospect of the ring-fence continues to be the most substantial change on the agenda. Retail banking will sit inside the fence and investment banking will go outside the fence – but it remains to be seen exactly where transaction banking will be positioned and what additional costs might arise as a result.
While the ring-fence is one of the most hotly debated aspects of the reforms announced by Osborne, he also referred to a number of other changes during his speech.
Comparing the banking industry to the electricity grid, Osborne said that new industry players currently have to go to one of the four big banks, which account for 75% of the country’s current accounts, to use the payment system – and that this is not conducive to innovation. As Osborne pointed out, plans are in place to reduce the time taken to switch bank accounts to seven days by September.
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| Ad van der Poel, product executive at Bank of America Merrill Lynch |
“Account switching is also a hot topic for the European Commission and it is likely we can expect EC regulation on this soon,” says Ad van der Poel, product executive for payments and receivables, EMEA at Bank of America Merrill Lynch. “There is also ongoing discussion in Europe around allowing other providers access to bank accounts. This is more complex but would mean that the issuing bank no longer has the sole right to offer services linked to a bank account number.” Osborne also announced that the government will “bring forward detailed proposals to open up the payment systems”, citing cheque-clearing cycles and debit and credit card payment clearing times as processes that are taking too long for customers and businesses.
The focus on cheque clearing signals a U-turn in policy. After putting in place plans to phase out cheques by 2018, the Payments Council reversed the decision in 2011, saying that "cheques will continue for as long as customers need them". However, the considerable disadvantages associated with cheque payments remain and some have expressed surprise that cheque-clearing times should be an area of focus for the upcoming changes.
In combination, the changes outlined are considerable. Lloyds Banking Group said that it “believes a more pragmatic approach to reforming the payments system will address concerns without the extreme disruption, risk, cost and unintended consequences that a utility infrastructure solution would pose".
The bank adds: “A payment infrastructure lite could be developed by the Payments Council and VocaLink, which allows smaller and new banks direct access to the current payment systems on a similar basis to established big banks on a plug-and-play basis. This would make market entry and exit easier and ensure smaller banks were on a level playing field.”
Other areas of change referenced during Osborne’s speech included the abolition of the Financial Services Authority, which is due to come into force on April 1, as well as the need to change the culture and ethics of the banking system, including making it a criminal offence to make misleading statements about Libor.
In short, the world of transaction banking – a business that was supposed to deliver stable profits, relatively unencumbered by a regulatory onslaught, unlike its racier investment-banking counterpart – faces disruption.