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Financial and Business Services Sector

Taken together, the financial services and business services sectors are amongst the most successful sectors in the UK economy in terms of employment creation, output, growth and profitability. Since 1980, the number of jobs in the sector has risen from 1.6 million to 2.8 million; the real output has doubled from 11 to 20 per cent of current-price GDP, and gross profits to almost Ј90 billion (Barron, 2004). This expansion was due to several factors, including growing consumer wealth, deregulation and demographic changes, as well as the trend in advanced economies towards services. Financial services output, as measured by percentage of GDP, was predicted to overtake that of manufacturing some time in 1996 (Bell, 1999). The financial services sector is made up of three interlinked and interdependent subsectors: retail, corporate, and City of London. It includes banks, building societies, insurance companies, mortgage lenders, securities houses, unit and investment trusts and increasingly a large number of non-bank institutions engaged in financial activity.

The business services sector includes a wide range of professional firms such as solicitors, management consultants, accountants and computer specialists. Although both these sectors are usually considered separately, they are interlinked in two critical ways: they buy services from one another, for example, the banking sector is one of the largest client groups for accountants and software services; they are beginning to compete for business; the movement of financial institutions into professional services is a major trend. For example, the Halifax Building Society now owns one of the largest surveying companies in the UK; and Barclays Bank has set up a large software services consultancy through outsourcing parts of its IT department.

This study concentrates on the UK retail financial services sector which comprises the services provided to the personal and small business sectors by the financial institutions such as banks, mortgage lenders and insurers.

This is distinguished from the services provided by these institutions to sophisticated business clients, which include large corporates, institutional investors, public services entities and governments, and from the services provided by organisations in the City of London, such as Lloyds and the Stock Exchange. The retail financial services sector provides six main services: savings, loans, mortgages, insurance, investment, and payment facilities. In addition, a small but increasing share of their income is coming from the provision of professional advice such as tax and financial planning. These services are delivered through four main subsectors: retail banking, mortgage lending, life and pensions and general insurance. Their survival as distinct groups of service providers depends on their response to three main business challenges.

The UK retail financial services industry now faces three main challenges: intense competition; more demanding customers; rapid technological progress. Financial services institutions now compete aggressively across the whole range of financial services, with, for example, banks, the larger building societies, and insurers offering the whole spectrum of financial services.

These companies also face competition from a range of new entrants as diverse as Marks & Spencer, General Motors, Virgin Airways, Microsoft, British Telecom, and foreign banks. All of these organisations are capable of taking large market shares from established UK companies. Ford, for example, which owns Ford Financial Services, already provides over $100 billion of loans to its customers. The proliferation of financial products and the number of new entrants is now leading to considerable overcapacity. The pace of competition is accelerated by the trends towards disaggregation and disintermediation. Most of the standardised core processing activities of retail financial institutions, such as mortgages, credit cards, loan instalments etc, can be outsourced to specialist companies. Disaggregation has major implications for competition because it means that any competitor with a well-known brand name and a large customer base could move into any area of financial services very quickly. As yet the process of outsourcing core processing is relatively undeveloped in the UK, whereas in the US it is quite advanced. However, it is expected to increase dramatically over the next three years.

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