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New banking entrants face “significant” barriers

New entrants to the retail banking sector face “significant challenges” in attracting customers and expanding market shares, a report from the Office of Fair Trading has found.

The review, launched in May, aimed to identify barriers to entry or competition against existing firms and barriers to exit for those who operate inefficiently.

In its findings, the OFT concluded that most prospective entrants are able to meet regulatory requirements and source the necessary inputs to offer retail banking services. However, the reluctance of personal and small business customers to switch providers, their loyalty to established brands, and their preference for banks with a local branch present obstacles to new providers hoping to expand market share.

OFT executive director for goods, services and mergers Clive Maxwell says: “Vigorous competition in retail banking is vital for personal and small business customers and helps support growth and productivity in the economy. If firms face difficulties entering and competing in the market, incumbents have less incentive to reduce costs, innovate and price competitively.”

A copy of the 243-page report will be submitted to the Independent Commission on Banking, set up by Government to examine issues of competition and stability in the banking market.

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