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Customer-led innovation in a competitive market
An Abbey case study

Page 1: A competitive market

The UK financial services sector has become increasingly competitive as a result of several changes. Successive UK governments have looked to encourage competition in financial services so as to give customers a better deal. An important development in this area was the so-called Big Bang in 1986. This opened up competition between firms on the London Stock Exchange, and also developed competition for High Street banking services, with new firms becoming eligible to apply for licences to carry out banking activities. Thereafter, individual institutions could carry out a range of functions such as personal banking, insurance, and offering mortgages, and the traditional distinctions between banks, building societies and insurance companies became blurred.

In particular, the Building Societies Act enabled (but did not require) building societies that had previously concentrated on offering savings and investment accounts and granting mortgages to provide a full range of banking services (e.g. current accounts, overdrafts, loans, provision of credit cards).

Given this opportunity to become banks, many building societies changed their legal status. Previously many had been mutual benefit societies run on behalf of their members (people with investment accounts). Many became public limited companies with shares quoted on the London Stock Exchange. This enabled them to raise additional finance to compete in the rapidly expanding financial services market. With increasing affluence, more and more people were seeking mortgages through which to become homeowners. They also bought other financial products e.g. private pension plans and new savings accounts (for example to save for their children's university education) etc.

In this new, competitive market the many providers of financial services are seeking to sell a large number of different investment and savings accounts, current and deposit accounts, mortgages, loans, insurance policies, cash cards, credit cards, etc. These products are targeted at specific market segments e.g. mortgages for home buyers, savings accounts for those with surplus funds, equity release schemes for elderly home owners. Unfortunately, from the consumer's viewpoint, sellers still tend to take a product-led view: instead of discovering what customers want, they offer whatever they find most convenient to provide.

Other changes in the market included the development of 24-hour telephone and Internet banking. This provides a new platform for banks to deal directly with customers and have a different relationship with them.

Abbey | Customer-led innovation in a competitive market

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