UK BANKING SECTOR
UK FinanceUK BANKING SECTOR – AN INVESTMENT OPPORTUNITYUK BANKING SECTORAn Investment OpportunitySeptember 20191
UK Finance2UK BANKING SECTOR – AN INVESTMENT OPPORTUNITYUK FinanceUK Finance is the collective voice for the banking and finance industry.Representing more than 250 firms across the industry, we act to enhance competitiveness, supportcustomers and facilitate innovation.Our PurposeTo champion a thriving banking and finance industry, acting always in the best interests of consumers,businesses and wider society.Our Objectives Enhancing competitiveness Supporting customers Facilitating innovationOur Values Integrity. We act transparently and ethically for the good of our members as well as theircustomers and wider society. We seek to enhance trust in the banking and finance industry. Excellence. We lead from the front as a beacon of quality, inspiration and best practice. Leadership. We are proactive and innovative in helping to shape tomorrow’s banking and financelandscape.ukfinance.org.uk
UK FinanceUK BANKING SECTOR – AN INVESTMENT OPPORTUNITY1INTRODUCTIONThe UK is a world-leading centre for finance and banking, and ourposition as a hub for international companies and investment remainsstrong.Foreign Direct Investment (FDI) inflows to theUK reached 122 billion in 2018, according toUNCTAD (United Nations Conference on Tradeand Development) preliminary estimates and theUK remains the third highest destination for FDIinflows after the US and China.The strength of the financial services industryplays a key role in helping to attract overseascompanies and investment. It delivers worldleading innovation, giving consumers andbusinesses new ways to pay, save, invest andborrow according to their needs. It also providesincoming companies with opportunities toinvest, grow and develop. The UK is also the topdestination in Europe for FDI, with 1,054 newprojects coming into the UK according to theEY 2019 UK Attractiveness Report which waspublished in June.The level of innovation is highlighted by thegrowth of new digital and physical businessmodels emerging across banking, payments,cards, platforms and wallets, all of which leadto greater customer choice and differentpropositions.Meanwhile, ensuring that the UK is the safestplace in the world in and from which to carryout financial services business is a priority forthe government and industry, informing newregulations and protections for both businessesand consumers.This has led to the launch of the UKgovernment’s Economic Crime plan, deliveredin partnership with the financial sector, andthe launch of the Financial Sector CyberCollaboration Centre (FSCCC), a joint venturebetween the UK’s leading banks and insurers, UKFinance and the National Crime Security Centreand the National Crime Agency (NCA). TheFSCCC will provide a body to address and tacklecyber threats in a faster, more coordinated andefficient manner, helping to mitigate systemicrisk and strengthening the resilience of the UKfinancial sector. It will do this by ‘enhancedcollaborative activities and focused operationsacross financial services organisation industrypartners and UK and international authorities’.While the UK’s departure from the EU posesundoubted challenges, the UK’s strength andnatural advantages will help to ensure ourongoing success as a leading hub for finance andbanking.These include our language, our time zone, ourstrong professional skills. Our world class legalsystem and respected and strong regulatoryframework. The importance of our broadfinancial ecosystem must also be understood,from our asset management sector which isworth 7.7 trillion according to figures fromTheCityUK, to the more than 2.3 million peopleacross the UK working across the industry.
2UK BANKING SECTOR – AN INVESTMENT OPPORTUNITYUK FinanceTHE UK FINANCE AND BANKINGSECTOR IN NUMBERSThe UK finance and banking sector is a major contributor to the economic success of theUK, the largest exporter of financial services in the world, and plays a key role in attractingoverseas investment to the UK.
UK FinanceUK BANKING SECTOR – AN INVESTMENT OPPORTUNITY3The UK is a major hub for foreign direct investment (FDI), coming third behindthe US and China and receiving more FDI than any country in Europe.Despite the uncertainty in recent years regarding the outcome of Brexit, FDIcontinued to grow, increasing by 20 per cent in 2018 compared to the previousyear, rising from 101 billion to 122 billion.FIGURE 1: FDI FLOWS BY TOP TEN COUNTRIES IN 2017 & 2018
4UK BANKING SECTOR – AN INVESTMENT OPPORTUNITY1.1 MILLIONJOBSUK-WIDE 132BILLIONSURPLUS OF 44BILLIONUK FinanceTHE UK FINANCIAL SERVICES INDUSTRYEMPLOYS MORE THAN 1.1 MILLION PEOPLEACROSS THE UK, TWO-THIRDS OF WHOM AREBASED OUTSIDE LONDON. FINANCIAL SERVICESACCOUNT FOR 3.1 PER CENT OF ALL UK JOBS.SOURCE: THECITYUK.THE FINANCIAL SERVICES SECTORCONTRIBUTED 132 BILLION TO THE UKECONOMY IN 2018. THIS ACCOUNTED FOR 6.9PER CENT OF TOTAL ECONOMIC OUTPUT.SOURCE: HOUSE OF COMMONS BRIEFINGPAPER – FINANCIAL SERVICES – CONTRIBUTIONTO THE UK ECONOMY.IN 2017 EXPORTS OF UK FINANCIAL SERVICESREACHED JUST UNDER 60 BILLION, WHILEIMPORTS OF FINANCIAL SERVICES TO THEUK STOOD AT JUST OVER 15 BILLION. THESURPLUS IN FINANCIAL SERVICES TRADETHEREFORE WAS 44 BILLION. THE UK HAS SEENA TRADE SURPLUS IN FINANCIAL SERVICES INEACH OF THE LAST 20 YEARS.SOURCE: HOUSE OF COMMONS BRIEFINGPAPER – FINANCIAL SERVICES – CONTRIBUTIONTO THE UK ECONOMY.
UK Finance5UK BANKING SECTOR – AN INVESTMENT OPPORTUNITYPAYMENTSPAYMENTS TIMELINEBarclays issues the firstUK credit cardTelephone banking isestablished by Girobank196619801976Paypal launches inthe UK2003First message sent by theSociety for WorldwideInterbank Financial Telecommunication (SWIFT).International electronicfinancial transactions arenow possibleThe debit card islaunched in the UK198719901997Cashback comes in andmore than six milliontransactions take place inthe first yearThe first internet bankingservice is launched byNationwideChip and PINlaunchesFaster PaymentslaunchedMobile bankingapps launch20042008201020072009Contactless creditcards introducedContactless debitcards rolled outSamsungPayLaunch ofApple PaySingle Euro Payments Area(SEPA) t cards overtakecash as the mostfrequently usedpayment method inthe UKRollout ofGoogle PayPaym launches, allowing customersto make payments to others usingjust a mobile phone numberOpen Bankinggoes live2018
6UK FinanceUK BANKING SECTOR – AN INVESTMENT OPPORTUNITYThe UK payments landscape has transformedover the last decade and the UK system isnow among the most innovative in the world,offering consumers and businesses diversityand flexibility through access to a huge range ofoptions designed to suit different needs.Consumers and businesses in the UK havelong had access to a wide variety of secureand trusted older payment methods, such ascash, cheques, debit cards, credit cards, BacsDirect Credit, Direct Debits, standing orders andCHAPS.However, in recent years, innovations inpayments have provided ever greater choice,convenience and, most notably, speed of35%20%BacsChequeFaster PaymentsCashDirect DebitsStanding OrderCardOther*payments to both consumers and businesses inthe form of Faster Payments, contactless cardpayments and mobile payment services such asApple Pay and Google Pay.The advent of online banking and, more recently,mobile app-based banking and other fintechinnovations have also revolutionised the waythat consumers and businesses manage theirfinances and initiate payments.The method of payment used by businesseswill typically vary according to whether theyare meeting wage and salary commitments,payments to other businesses or regular businesscommitments such as rent, rates or utility bills.17%9%6%4% 3% 6%*Includes PayPal, Apple Pay,Google Pay, CHAPS and otherlow-volume payment methodsFIGURE 2: METHODS THAT UK BUSINESSES USE TO MAKE PAYMENTSIn recent years there has been significant growthin the use of Faster Payments by businesses of allsizes. The Faster Payments Service, introduced in2008, is a UK banking initiative aimed at reducingpayment times when payments are made froma customer’s bank account to a different bank’scustomer account.a way of making such payments without needingto become a Bacs originator.It has achieved particular prominence amongsmaller businesses, perhaps reflecting theincreasing popularity of online and mobilebanking as a method of managing SME finances.As a result of the growth of online and mobilebanking, small businesses are now able to accessconvenient and cost-effective methods ofinitiating account-to-account payments andSMEs appear to have taken to Faster Payments asProportion of outgoing paymentsmade by businesses that were madeusing Faster Payments:In 2018 20 per cent of all business payments wereFaster Payments, up from just three per cent in2012.3%201220%2018
UK FinanceUK BANKING SECTOR – AN INVESTMENT OPPORTUNITYThe increased adoption of online and mobilebanking by businesses and consumers isexpected to fuel strong growth in FasterPayments and other remote banking over thenext decade. Open Banking also offers significantpotential for further growth in the use of FasterPayments. There is potential for Third PartyProviders (TPPs) to offer payment initiationservices to consumers, allowing payments foronline shopping to be made directly into theaccount of the retailer at checkout, ratherthan through cards or PayPal accounts. FasterPayments could then be used for onlineshopping. This service could also be extended topayments in physical stores.The Bank of England (BoE) and Pay.UK arecurrently looking at developing a ‘common creditmessage’ that could be used in the BoE Real-timeGross Settlement (RTGS) service and Pay.UK’sNew Payments Architecture, in order to makethem inter-operable.Direct Debit was introduced in the UK in theearly 1960s and we were the first country tointroduce such a system. It is the most commonform of payment for consumers paying regularbills, with nine out of ten UK consumers payingsome or all of their regular bills this way. It isa familiar, long established and widely trustedform of payment. Direct Debit payment volumesrose three per cent in 2018 to 4.4 billion, with anoverall value of 1,327 billion.D4.4 1,327BILLIONBILLION7Making payments via Direct Debit also offersconsumers protection against errors or fraud, inthe form of the Direct Debit guarantee.While companies are far less likely to use DirectDebit for outgoing payments, many will still useDirect Debits to pay for business-critical servicessuch as energy, telecommunications or internetaccess. The strength of the Direct Debit systemalso means that companies coming into the UKto operate benefit from knowing there is anestablished payments method in place whichalready has the trust of consumers and whichensures that the majority of regular bills are paidon schedule each month.
8UK BANKING SECTOR – AN INVESTMENT OPPORTUNITYUK FinanceCARDSMeanwhile UK consumers exhibit one of thehighest card usage levels in Europe. Increasinglyconsumers in the UK are turning to cards tomake payments, whether by debit or credit,contactless or chip & PIN, online or in-store, onday to day purchases or on major spends.Overall 47 per cent of all payments were madeby card in 2018 and this is forecast to exceed 50per cent by the end of 2019.47%of all paymentsmade by cardIn large part, variations between countries inthe level of adoption of card payments tend tobe driven by cultural and historic differences. Inthe UK the extensive and growing use of cardsreflects both the strength and stability of thepayments system, as well as the range of optionsavailable to consumers, the high level of bankaccount holding (and hence debit card holding)and the trust consumers place in these.In the Nordics, there is also widespread adoptionof cards, with many Nordic countries exhibitingsome of the lowest levels of cash usage inEurope. Again, this is partly due to culture,historic and socio-economic reasons, with highGDP per capita, well-developed infrastructure,and small highly concentrated populationshelping to facilitate the widespread adoption ofelectronic payments.In contrast, the use of cards is far less widespreadin much of Europe, including countries such asGermany and Spain, and also further afield incountries such as Japan, where use of cards tomake payments is far rarer.
UK FinanceUK BANKING SECTOR – AN INVESTMENT OPPORTUNITYA more recent but increasingly widespreadinnovation across the UK is contactlesstechnology to make payments. Contactlesscards were first launched in late 2007 yet takeup by consumers was initially slow, due to theslow roll out of contactless-enabled cards, thelack of contactless-enabled payment terminalsin retail locations and the lack of informationprovided to consumers about how to use thisnew technology.However, when Transport for London (TfL)introduced contactless payments on the Londonbus network and then the tube network in 2015,it proved a turning point by providing a safe andfamiliar environment for consumers to try outthis new payment method. As consumers feltmore comfortable with contactless, they hadthe confidence to use it in a retail environmenttoo. This experience has been repeated on otherpublic transport networks across the UK.In fact, the introduction of contactless paymentson public transport networks has not only drivenwider adoption of contactless payments in theUK, but also in other countries around the world.London’s world-leading adoption of contactlesspayments has been seen as an example to othermajor cities, with delegations coming from allover the world – including Mexico and CostaRica – to find out more about the TfL system.9There were nearly 124 million contactless cardsin circulation in the UK at the end of 2018, with84% of debit cards and 64% of contactless cardsin the UK having contactless functionality.124 millioncontactless cards in issue by endof 2018, a 4% increase comparedto 2017
10UK BANKING SECTOR – AN INVESTMENT OPPORTUNITYA survey by TfL, the Transport Focus survey,found that of customers using contactlesspayments in general retail, 84 per cent cited‘speed’ and 79 per cent cited ‘ease’ as reasons foruse.84%SPEED79%EASE OF USEIn 2018 there were just under 7.4 billioncontactless card payments, with contactlessdebit card payments accounting for 6.3 billionof these and contactless credit card paymentsaccounting for 1.1 billion of these.7.4 billion ontactless card payments 7.4BILLIONThe number of businesses and otherorganisations (including charities) that nowaccept contactless payments continuedto grow in 2018. As consumers becomefurther accustomed to using the contactlessfunctionality on their cards, this may reinforcethe migration of lower-value payments fromalternative payment methods to contactlesscards.UK FinanceThe card industry has also committed toensuring that from 2020 every bank-issued cardacceptance terminal in the UK will be capable ofaccepting contactless payments.While the ease and convenience of cardpayments, in particular contactless payments,has helped to drive huge growth in this area,customers and businesses are also reassured bythe protections available to them when usingcards. For example, Section 75, which covers theuse of credit cards, ensures card users receivefull refunds in the event of paying for goodsor services that they don’t receive (even in theevent of a retailer going under) or that weremisrepresented.
UK FinanceUK BANKING SECTOR – AN INVESTMENT OPPORTUNITY11BUT WHAT NEXT?So what next for the UK finance and bankingsector and in particular the UK paymentsindustry, which is vital to the UK’s ongoingeconomic success.In the Bank of England’s recently published‘Future of Finance’ report, the author Huw vanSteenis highlights the emergence of a ‘neweconomy’, which is being driven by technologicaldevelopments, as well as demographics and theenvironment.Within the report it is suggested that more than40 per cent of financial services could be cloudhosted in a decade. This is perhaps inevitableas growing numbers of fintechs, start-ups andtechnology companies are now entering financialservices and payments in particular.The shift to digital is also clear, with 19 per centof retail sales now online, compared to 11 percent five years ago; while 83 per cent of SMEsnow use a mobile banking app.In the report van Steenis says: “Finance is likelyto undergo intense change over the comingdecade. The shift to digitally-enabled servicesand firms is already profound and appears to beaccelerating.”The rapid pace of change also means it isessential that government, regulators and thefinancial industry assess and adjust how weoperate says Van Steenis, pointing out that ‘asour payments habits shift, we need a nationalpayments strategy to improve our paymentsinfrastructure and regulation – which doesn’tleave anyone behind’.While there are clear opportunities, there arealso notable challenges ahead. Technologyis enabling greater efficiency and closerconnections with global trade but there is alsoincreased competition from non-traditionalfinance providers and a rapidly changingregulatory environment to which companiesmust adapt.As the former Chancellor Philip Hammond MPsaid in his valedictory Mansion House speech,our position as the world’s foremost globalfinancial hub depends in part on our ‘ability tointegrate the technologies of the future into ourmainstream financial services’.Mr Hammond said we must build on our ‘longtraditions of innovation, resilience, agility andopenness to create a platform for the future,while also concluding that ‘we are seeing, allaround us, unprecedented financial servicesinnovation’.This is evidenced in part by the huge change theUK payments industry is currently undergoing,with the ongoing development of the NewPayments Architecture (NPA).The introduction of the NPA will effectivelybring in a wholesale redesign of the ‘piping’of interbank payments, by rebuilding the UK’sexisting 6.7 trillion payments infrastructureto further futureproof the system. Describedby the former New Payment System Operator(NPSO), now Pay.UK, as a ‘new conceptual modelfor payments in the UK’, as well as underpinningexisting Bacs, Faster Payments and chequepayments, the NPA will integrate and overlayservices such as Confirmation of Payee andRequest to Pay (see below) to make the entiresystem more resilient and flexible.
12UK BANKING SECTOR – AN INVESTMENT OPPORTUNITYRequest to Pay is one of the first steps in thedelivery of the NPA and it is expected to launchlater this year. It is a secure messaging servicethat will give businesses more flexibility aroundhow payments are made.Under the system businesses or individualscan request payment by sending an electronicrequest to the bank account of the person orcompany owing funds to them. The debtor willsee the request, with this expected to be sentvia a mobile banking app, showing the amountrequested and the date payment is due.However, the significant change is that thedebtor will then be given a number of choices:to pay the bill in full; to pay part of the bill;to ask for an extension; reject the requestfor payment; send a message to the firm orindividual concerned.The idea behind the process is to accommodatepeople’s changing lifestyles by allowing a degreeof flexibility with payments and allowing themto better manage their finances. While manycompanies already offer some flexibility aroundpayments in certain situations it is largelymanual, and this system should make it easierand more cost-efficient for businesses to offerflexible payment options to customers.UK FinanceAnother step in the direction of the NPA willbe the introduction of ‘Confirmation of payee’which is due to be introduced at the end ofMarch 2020. This will ensure that when accountto account payments are made, instead of justrelying on the accou
8 UK BANKING SECTOR – AN INVESTMENT OPPORTUNITY UK Finance Meanwhile UK consumers exhibit one of the highest card usage levels in Europe. Increasingly consumers in the UK are turning to cards to make payments, whether by debit or credit, contactless or chip & PIN, online or in-store, on day to day purchases or on major spends. Overall 47 per cent of all payments were made by card in 2018 and .
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