Interest rate cut and regulation forecast to boost digital banks

Incumbent high street banks will face losing up to 8 per cent of their revenues over the next three to five years from the twin threats of challenger banks and ever-increasing regulation.

According to a report from professional services group Accenture, the losses will stem from vanishing charges on services like overdrafts and cross-border payments, which regulators and startups are bearing down on.

Because of the size of the UK’s financial services industry, it is among the most at-risk countries for the disruption in these kinds of charges, only beaten by Australia where 9 per cent of retail banking revenues are at-risk.

“Whether in one year or five, the billions in revenues that traditional banks worldwide collect annually for basic services and penalties, like overdraft fees, will erode,” said Alan McIntyre, senior managing director and global head of Accenture’s Banking practice.

“Banks that proactively cannibalize this diminishing revenue by helping customers manage their money better will earn their trust, which benefits both parties.”

Today’s news that the Bank of England is slashing the interest base rate to 0.25 per cent is expected to be another boost for challenger banks.

Another pressure on incumbent banks came today from the news that the Bank of England is slashing the base rate to 0.25 per cent and introducing a new term funding structure.

“The new Term Funding Scheme gives a further round of four-year funding at the newly reduced base rate,” wrote Rob James this morning, manager of Merian Financials Contingent Capital Fund and financials analyst at Merian Global Investors.

“The winners are OneSavings Bank, Virgin Money UK and other “challenger” banks.”

James expects the move will also “extend the pain for the incumbents” in part because the rate will further squeeze the margins they charge on their loan books.

On this flip side, in the longer term, Accenture forecasts that incumbent banks could benefit from up to 15 per cent of incremental revenue growth if they seize on the opportunity in financial services disruption.