If Ulster Bank leaves, consumers will be the big losers

Rabodirect, Danske Bank, Halifax/Bank of Scotland, ACCBank, Tesco, Leeds Building Society, Nationwide UK, MBNA, Investec, Quinn Life, Anglo Irish Bank, Irish Nationwide, Start Mortgages, First Active, Postbank, Bloxham Stockbrokers, Friends First... these are just some of the long list of financial institutions that have disappeared from the Irish landscape in recent years.

Come this Friday, there might be another name to add to the list, as Ulster Bank owner NatWest is expected to give an update on its plans for its Irish operations. If it does go, the departure of Ulster Bank will likely be the biggest loss of them all.

The bank has more than €30 billion in assets, some €20 billion in deposits, 1.1 million personal and business customers in the Republic, some 88 branches, and straddles retail, corporate and commercial banking.

It may have had the dubious honour of bringing 100 per cent mortgages to Ireland back in 2003, but it has also been a dependable source of competition. Its absence may be felt the most keenly on the SME lending side, as it would reduce competition in that market to just AIB and Bank of Ireland.

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But it would also be deleterious to the retail banking market.

Diminishing competition

A decline in competition is something Irish consumers have had to weather for some time now, with so many financial services providers, as mentioned above, departing the market in recent years.

This lack of competition may be most pronounced in the life and pensions sector. If you go into any of the five main retail banks for a life insurance product for example, there’s an 80 per cent chance you’ll come out with an Irish Life policy, as only Bank of Ireland is not a tied agent of the life company.

It’s also a problem elsewhere. Back in 2004, for example, the cost of a mortgage in Ireland was the third cheapest of 13 European countries: today we’re the second most expensive, behind only Greece.

There are specific reasons behind this, as the financial crisis and resultant property price crash continue to weigh heavily on the Irish banking sector. As a report from the Banking & Payments Federation Ireland this week noted, lenders in Ireland are required to hold about three times more capital when compared with averages in Europe. The difficulty in repossessing property is another factor in setting banks’ capital reserves. It all adds to the cost of lending in Ireland.

But they aren’t the only reasons. Back in 2018, the then head of the ECB, Mario Draghi, described the Irish banking market as a “quasi monopoly”. If Ulster Bank leaves, we should only expect this to get worse.

New pretenders

Yes, competition can have its issues; think of the drive for market share which led to some disastrous lending decisions in the run-up to the crash. In general however, it can be a force for good.

Before it left, Halifax brought in tracker mortgages, setting off a snowball effect that saw almost every lender offering cheap mortgages until markets caught up with them. Danske Bank introduced the concept of discounted interest rates on mortgages with lower loans to value before it departed, something from which many homeowners with significant equity in their homes still benefit. For their part, both Nationwide and Rabodirect offered the best rates on savings for some time.

But with fewer financial services providers, the incentive for those who remain here to ramp up their offerings is lower.

Of course, the direction of financial services providers hasn’t just been one way. There have been a number of new entrants in the Irish market too, such as Revolut, N26, Avant, Finance Ireland to name a few. All are important in offering Irish consumers choice but these new arrivals are also very different from the likes of an Ulster Bank.

Diluted competition

Consider Avant. Owned by Spanish bank Bankinter, it first started lending for mortgages in Ireland back in September 2020. With rates as low as 1.95 per cent, one could have reasonably expected it would shake up the market.

But its approach thus far has been to cherry pick to whom it lends. Its best rate is reserved for those who need to borrow less than 60 per cent of the value of their home, while it also restricts lending to the more urban parts of the State.

This means that its impact may have been more muted than some would have hoped. Last month, it revealed that, since its launch, it had received about €200 million in mortgage applications. If you took an average mortgage of €200,000 however, this would equate to just 1,000 applications, or 1,333 with an average mortgage of €150,000.

Understandably then perhaps, the response from some of the major players has been so quiet it has yet to be heard. Bank of Ireland, for example, which has a 23 per cent share of the mortgage market, has made no move to lower its rates since the arrival of Avant. In fact, it hasn’t changed its rates since 2019.

The same could be said of the likes of Revolut and N26. They might garner headlines, with their snazzy apps, and fun ways to save, but they still offer only a limited service in Ireland.

You can’t borrow from them, you can’t visit them in a branch, you can’t cash a cheque, you can’t get an overdraft and you can’t benefit from the deposit protection scheme on your savings – with Revolut at least.

Consumers may have rushed to sign up to their services – at last count, Revolut has some 1.2 million Irish customers – but their arrival hasn’t cut the cost of banking. In fact, both AIB and Bank of Ireland have recently hiked charges on their current account offerings.

New entrants need to offer a broad offering to really count in the Irish market and unfortunately, for now at least, if the decision on Ulster Bank is in line with what many expect, the trend is going only one way.