Our External Environment

We operate in an increasingly dynamic market


Given our UK focus, the Group's prospects are closely linked to the fortunes of the UK economy.

The economy faces significant uncertainty around the UK's departure from the EU. With the expectation that the UK leaves in an orderly fashion, the economy should be able to grow in 2019 at a similar pace to 2018.

Our low risk business model and focus on efficiency positions us well irrespective of macro conditions, but if the UK economy sees significant sustained deterioration this is likely to impact Group performance.


As the largest provider of UK banking services, our prospects are closely aligned to the outlook for the UK economy. In the period following the decision to leave the EU, the economy has been resilient. Growth has slowed only slightly below its trend rate, the unemployment rate has continued to fall to a 43 year low, and property prices have continued to rise slowly. This resilience is expected to continue in 2019 and the next few years, barring any sudden shocks to business or consumer confidence particularly in connection with the UK's exit from the EU during 2019.

Market dynamics

Households’ spending power has been improving in recent months as pay growth has begun to pick up and outpace inflation, which is falling back towards the medium term target of 2 per cent. Inflation adjusted pay is now slightly above its previous peak in early 2016. This improvement is expected to continue through 2019, supported by a reduction in planned fiscal tightening announced in the 2018 Budget in November and the end of the cap to public sector pay growth. The improvement in spending power should help support growth in consumer spending and  borrowing, whilst also increasing growth in households’ savings. 

The UK housing market has been broadly flat in 2018 in aggregate, although weakness has been centred around London and the  South East where high prices are constraining affordability. Improved households’ spending power should support the housing market in 2019, as would resolution of uncertainty about the immediate political and economic concerns. Operational impacts of the UK’s exit from the EU present risks for some of our customers’ businesses. With the future trading arrangements between the UK and EU unlikely to become finalised for a few years, businesses’ investment decisions are more  difficult and postponement of investment may weigh on future growth capacity of the economy. Uncertainty is also challenging the UK’s attractiveness to foreign investors, although many qualities that have attracted investors in the past remain.

More widely, the global economy is  transitioning away from the exceptionally low interest rates in place in most advanced economies since the financial crisis. This process will not always be constant, with different countries at different stages of their economic cycle, and unwinding of ‘quantitative easing’ may increase volatility in financial markets. The widespread trend to increasingly populist politics, of which the US-China trade war is a prime example, poses a challenge to appropriate economic policy. 

Barring sudden shocks stemming from these challenges, the UK economy is expected to grow through 2019 to 2021 at a pace similar to that of the past three years, around 1.5 per cent. The unemployment rate is expected to rise only a little from its current 43 year low, and further mild increases in house prices are expected. The Bank Rate is expected to rise only slowly, as the uncertainty drag on the economy fades. Growth in many of our markets is expected to pick up, although the consumer credit market should continue to slow after its strong growth through 2014 to 2017. Impairments are expected to increase in 2019 as we continue to see lower write-backs and recoveries but remain at relatively low levels.

Our response

Given our UK focus, the Group’s prospects are closely linked to the performance of the UK economy. Our low risk, stable business model and focus on efficiency positions us well to continue to support customers irrespective of macro conditions.


The UK financial services sector is expected to remain highly regulated.

There is increasing clarity on impending regulation although new regulation and market reviews continue to be issued.

Market dynamics

A number of key regulatory changes have been implemented in the last 12 months including ring-fencing and GDPR. The key areas of focus for 2019 are as below:

Open Banking

Open Banking regulation was implemented in January 2018 with the aim of increasing competition by enabling customers to view personal financial data from different providers in one place. Although currently just relating to current accounts it will be extended to other products in 2019 and beyond. Customer data protection is integral to this with new EU wide technical standards (PSD2) due to be implemented by September 2019.

Customer treatment

A number of specific product reviews are currently being undertaken by the regulators to ensure product clarity and pricing transparency. These include reviews of the mortgage market, overdraft charging and savings accounts.

Capital regulation

The Group continues to prepare for a number of regulatory capital developments with uncertainty remaining around the implementation and impact of the final Basel III reforms.


A number of other regulatory initiatives are currently in the pipeline, which seek to address, among other things, vulnerability, access to services, customer treatment and choice, and competition.

Our response
As a Group we always seek to comply with all related regulation. 

Given the Group’s simple, low risk business model, it is well placed to meet these requirements and welcomes the positive effect that they will have on the industry, its customers and other stakeholders.

Key messages

Customer behaviours continue to change, with an increasing focus on personalised customer experiences and convenient, instantly accessible services, with these developments enabling customers to exert greater control over their finances than ever before.

Evolving demographics and life patterns are changing the financial needs of our customers, in particular increasing focus on financial planning for retirement.

Market dynamics

The needs and expectations of our customers continue to evolve, driven by changing
demographics and life patterns along with increased choice, both in terms of provider
and channel. The increasing use of digital has provided more brand choice for the customer across a number of sectors, with technology developments also raising customer expectations for control of their finances, both in terms of seeing their accounts in one place and monitoring transactions. 

As we continue to see in a number of other industries, incumbents who do not respond to changing customer preferences and behaviours are at the greatest risk.

Our response

We have a proven track record of providing products and services that our customers  value but it is imperative that we keep pace with market developments in order to  maintain relevance with our customer base.

Our multi-channel offering, including the largest branch network and digital bank in the UK, enables customers to interact with us in whichever way they prefer. In addition, our customer data provides the Group with a wealth of information that we are now using to facilitate greater personalisation, while ensuring we meet all of our customers evolving banking and insurance needs. 

Changes to customer expectations and behaviour, demographics and life patterns mean that we cannot be complacent. 

While we have a number of competitive advantages in the current environment, including our differentiated multi-channel and multi‑brand propositions, securing and enhancing the relationships with  our customers will be paramount to our future success.

Key messages

The pace of digital adoption continues to surpass expectations and is likely to increase further in the coming years.

Harnessing new technology is enabling us to respond to customers' needs more rapidly and efficiently.

Cyber security and the protection of customer data are increasingly important factors in retaining customer trust.

Market dynamics

The pace of digital adoption continues to surpass expectations and this trend is likely to accelerate further, transforming the way in which customers interact with banks. New entrants to the financial services market are increasing disruption through the innovative use of technology and data, often specifically targeting small, profitable niches. These new entrants have also been increasingly collaborating with incumbent banks, while established peers have more recently launched their own standalone propositions designed to increase disruption. 

Security and resilience remain important  factors, with the ability to respond to heightened cyber and fraud risks key to retaining customer trust in a digital environment, particularly given the introduction of Open Banking and API-enabled propositions which are changing the manner in which customers are able to share their data.

Our response

As the UK's largest digital bank, we are embracing technological developments to enhance customer experience. The increasing use of intelligent systems provides an opportunity to respond to customers growing expectations for personalisation, relevance and control, while the automation of simple transactions increases our capacity to focus on complex, value adding transactions. In addition, the use of technology provides organisational benefits in terms of efficiency, our ability to respond quickly to an evolving operating environment, as well as aiding risk taking decisions and mitigating fraud. 

We remain focused on further enhancing the customer experience and building on our market leading efficiency position through the use of technology, supported by a significant increase in investment over this strategic plan. In doing this, we must ensure that we continue to respond to innovation and meet the needs of our diverse customer base whilst ensuring  system resilience and security.

Key messages

Competition within UK financial services remains high.

The competitive landscape is changing with new entrants such as fintechs and tech giants continuing to increase disruption through innovation, while incumbent banks continue to re-focus.

Market dynamics

Our competitive landscape continues to evolve. A number of domestic incumbents are intensifying their focus on the UK market, as a result of restructuring post-financial crisis and ongoing regulatory changes. In addition we are seeing increasing competition from smaller non traditional and technology focused companies, some of whom are partnering with large, traditional banks to build scale and drive efficiency. Tech giants also remain a future threat to the financial services sector, given strong brand loyalty, access to significant customer data and a focus on delivering great customer experiences.

Looking ahead, competition is likely to remain high, increasing focus on innovation and placing pressure on earnings across the sector.

Our response

With customers becoming more empowered as a result of greater choice than ever before, we must continue to be responsive to their changing expectations and ensure that we continue to offer products and services they value. These expectations are likely to be increasingly influenced by non-traditional competitors in other industries as they continue to raise the bar for innovation.

Our leading cost position, combined with our simple business model, provides us with the operational flexibility to compete effectively. However, we are going further to respond to these threats and our current strategic plan should equip us well to combat these challenges. 

While greater competition increases choice for consumers and reinforces the need to further improve the customer experience, the breadth of our multi-brand and multi-channel offering along with our market leading efficiency and customer focused business model means we continue to compete from a position of strength.