In an update to its 2018 strategic review of retail banking, the FCA found that, while still strong, there are signs large banks’ historic advantages are starting to weaken, driven by digital innovation and changing consumer behaviour.

The share of personal and micro-business current accounts held by digital challengers rose between 2020 and 2021, while the largest banks saw their share fall. This trend occurred even as large lenders lent proportionately more to microbusinesses during the pandemic.

Collectively, digital challengers now have around 8% market share for personal current accounts and have also grown their share of SME accounts and lending during the pandemic.

"If recent trends continue, we would expect to see consumers steadily increasing use of their digital bank accounts as they gain familiarity," states the FCA. "Both Starling and Monzo have seen increasing average balances per account. In its Q2 2021 trading update, Starling reported average balances of £2,000 per account (up around 100% on the previous year)."

Evidence also suggests that intense competition, partly driven by the increased use of brokers, has benefited mortgage borrowers through lower interest rates, though these make it more difficult for smaller lenders to compete.

Adoption of digital innovations by banks and their customers, accelerated by the pandemic, has also improved service quality and satisfaction, particularly for mobile and app-based users. Further improvements through innovation are likely to be enabled by the growing adoption of Oepn Banking-based data sharing services.

Kate Collyer, FCA chief economist, says: "Competitive pressures and innovation are starting to deliver for retail banking customers, with greater choice, lower prices and more convenient ways to bank. But changes that may benefit many of us can also be a risk to those in vulnerable circumstances, which is why we have put in place guidance on the closure of branches and ATMs. We are also consulting on a new consumer duty to set higher expectations for the standard of care that firms provide."

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