The Office of Fair Trading has launched a review of barriers to entry, expansion and exit in the retail banking sector.
Some new entrants have recently been granted banking licences. Virgin Bank and Metro Bank have been set up on the direct-only side while Aldermore and buy-to-let lender Precise Mortgages have moved into the intermediary-only area.
There are also other would-be lenders which have not yet received FSA approval or have been delayed in the authorisation process.
Precise Mortgages managing director Alan Cleary says the two main barriers are liquidity and the cost of technology.
He says: “Liquidity is the number one barrier – finding any money. Some people are saying they would like to launch but cannot do so because they have not got the money.
“The number two barrier to entry is technology. You need a chunk of capital to build a fit-for-purpose, lender. I would say it costs a minimum of £10m for the IT, the people and the infrastructure to set up. You have to have a fairly bullish investor.”
Home Funding chief executive Tony Ward says the Government must adjust its priorities and not favour the big banks as much. He says: “There is not really any evidence of any new money coming into the market to support existing lenders, let alone new lenders, unless you are one of the ’too big to fail’ lenders.
“I can sort of understand that but if you compare our market with Australia market, where the authorities provided support to non-bank lenders, we have had nothing like that. Their market has operated with far less disruption and dislocation than here.
“I am hugely sympathetic to regulators and governments really focusing their attentions where they have needed to in a crisis but we are nearly three years into this crisis now and you have to decide who needs a bit more help.” Aldermore residential mortgages chief executive Colin Snowdon says some parts of the mortgage market are so starved of funding that just having some money to lend is a unique selling point.
He says: “In order to grow, you have to be appealing to consumers. It just so happens these days that having some funding available is key. If you look at Precise, I have no doubt they will succeed because there is a chronic shortage of funding in the buy-to-let market.
“We have slick technology but also human underwriters, which is proving to be very popular with brokers. That is part of our proposition. You have always got to have something that consumers want.”
But it remains to be seen how many of the new breed of lenders will be intermediary-friendly.
Snowdon says those wanting a substantial presence in the market will have to use intermediaries.
He says: “I think most new mortgage lenders will be intermediary-focused because history proves that going direct for consumer mortgages is very expensive. You have to spend a lot of money creating your brand and awareness of it and the payback time is a long one. What people have learned is that if you want to make an impact, you go intermediary.”
“I think it is a route to distribution. You have to pay the intermediary to distribute the product on your behalf but it saves you a lot of other costs and gets your brand out into the marketplace much more widely. With an intermediary, they will sell your brand for you’
But Cleary says: “There are a couple who are lining up and not going to use intermediaries. I think we will see a number of different strategies in terms of distribution.”
MoneyQuest managing director Simon Jackson says lenders should not be too quick to dismiss the idea of using intermediaries, as they are effective at selling a lender’s brand.
He says: “I think it is a route to distribution. You have to pay the intermediary to distribute the product on your behalf but it saves you a lot of other costs and gets your brand out into the marketplace much more widely. With an intermediary, they will sell your brand for you.”
Jackson adds that there will be a mix of distribution methods from any new lenders that come to the market. He says: “I think some will and some will not use brokers. The likes of Tesco have got a big brand and massive distribution, so I do not think they will bother with intermediaries at all but I think Virgin might.”
The British Bankers’ Association says: “We welcome further competition which brings greater choice for customers and a further spur to the innovation and market liberalisation which has made UK financial services a major export-earner.
“At the same time, it is clearly important to consider how best to ensure the taxpayer does not bear the brunt of any future problem in the banking sector. We recognise the banking industry must bear the cost and last year’s Banking Act set out how our authorities could intervene in good time.”