Business diversity can strengthen financial resilience and help to create a more sustainable economy. Resilience requires a deeper understanding of how institutional structures and business strategies shape the financial system.

The UK retail banking sector has long been dominated by the “Big Four” (HSBC, Barclays, Lloyds, and NatWest) despite ongoing efforts by policymakers to foster greater competition. Over the past decade, more than 40 new banks have been authorised to operate in the UK by Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). Yet, despite the number of new entrants, the Big Four continue to hold a dominant share of the market. This persistence highlights a core challenge: while entry barriers may be falling, competition remains constrained by customer inertia and market structure.

Bank customers are notoriously sticky. Many customers have opened a digital bank account, but evidence shows that few are willing to shift their entire financial lives to a challenger bank. In a market where basic banking services are generally reliable, switching costs, real or perceived, remain high. In addition, customers might be worrying about the profitability of newer institutions. Several smaller lenders have recently exited the market due to weak performance.

This has created opportunities for incumbent banks and building societies. The acquisition of Virgin Money by Nationwide in 2024 is emblematic of this trend, creating the UK’s second-largest provider of mortgages and savings accounts and reflecting growing pressures for consolidation driven by regulatory costs, the need for digital investment, and profitability concerns.

As the experience of challenger banks shows, scaling alternative models remains difficult without supportive regulatory and financial infrastructure. Against this backdrop, the UK government’s recent renewed commitment to the mutual and co-operative sector reflects a broader belief that diverse ownership and governance models can strengthen financial resilience and contribute to a more sustainable economy.

Our recent research, published in the Journal of Financial Stability, shows the importance of business model diversity. We find that different banking models carry distinct risk profiles, with market-oriented institutions contributing disproportionately to systemic risk during periods of financial stress. Our results underscore the need for a more nuanced approach to regulation, one that moves beyond one-size-fits-all frameworks and recognises the different dynamics of retail, mutual, investment, and digital-first institutions.

In today’s environment of overlapping crises, from geopolitical shocks to climate and technological disruptions, resilience cannot rely on capital and liquidity buffers alone. It requires a deeper understanding of how institutional structures and business strategies shape the financial system. A diverse ecosystem of banking models offers a buffer against herd behaviour, regulatory blind spots, and systemic concentration.

To build a more competitive, resilient, and inclusive banking sector that support both innovation and stability, and fosters the country’s economic growth, policymakers must look beyond balance sheets, and instead monitor the strategic evolution of bank business models. 

Find out more: Ayadi, R., Bongini, P., Casu B., & Cucinelli, D. (2025) The origin of financial instability and systemic risk: Do bank business models matter? Journal of Financial Stability. doi.org/10.1016/j.jfs.2025.101403

This article was first published in Society Matters magazine.