“Traditional banks are under pressure from three fundamental developments in financial services: tighter regulation encouraging transparency and choice, increased competition from challenger banks and new technologies lowering barriers to entry in the sector. Banks have not typically rewarded loyalty and have been slow to adopt innovation particularly in the areas that are most helpful to customers such as budgeting and providing the information they need to make informed decisions themselves.

“With greater market choice and the ease with which customers can move current accounts, switching rates should rise. The FCA´s announcement on Tuesday of the ‘biggest intervention in the overdraft market for a generation´ is set to create a further challenge for traditional banking models.

“The unbundling of current accounts is a potential way for banks to meet this challenge. This would see overdrafts offered either via a marketplace or through other more specialised providers. This raises new challenges, including the ability to access data and score customers for credit; increased costs incurred by removing the subsidy for ‘free-if-in-credit’ current accounts from overdraft fees and interest; and the dilution of customers’ relationships with their main bank.

“We believe that alternative sources of revenue, largely ignored in the report, are likely to become crucial to secure banks’ continued profitability. These include referral fees from selling other banks´ products via their own marketplace or making introductions to non-financial services such as utility companies. Commissions on non-financial goods may also become more prominent – in Spain, La Caixa is now the largest seller of Samsung TVs as it offers these through its branches as well as the loans to pay for them.

“Banks can charge other providers landing fees for virtual ´real estate´ for products offered via a bank´s website or marketplace platform. Another revenue stream might be created by reselling the data generated by bank customers to third parties, assuming that they respect their GDPR commitments. And the more digitally-focused banks are offering access to their platforms via their own APIs, for which they are starting to charge a levy.

“The FCA´s report lists a range of potential revisions to services and innovation. What it largely ignores is how banks will continue to make money in future, although this, of course, falls outside the regulator´s remit. Pressure on fee income will continue as regulatory intervention and competitive forces drive down pricing for services which banks might have charged for. A continued low-interest rate environment means banks cannot look forward to uplift from net interest income while new market entrants are attacking their most profitable areas such as cards and loans with niche products.”