Our External Environment

We operate in an increasingly dynamic market


  • Given our focus on UK customers, the Group’s prospects are closely linked to the fortunes of the UK economy
  • On the assumption that the global economy remains broadly stable, we would expect the UK economy to grow in 2020 to 2022 at a pace slightly above that achieved in the past two years
  • Our low risk business model and focus on efficiency positions us well irrespective of macro conditions. Nevertheless, if the economy was to be impacted significantly by crystallisation of either domestic or international risks, Group financial performance would be impacted

As a leading UK bank, our prospects are closely aligned to the outlook for the UK economy. Through 2019, the economy continued to show resilience to twin challenges from a slowing global economy and increasing domestic political uncertainty. Although growth of the UK economy has slowed to its weakest since the financial crisis a decade ago, and interest rates remain very low, unemployment has fallen further to a 44 year low and house prices have continued to grow. Barring any sudden shocks to business or consumer confidence, growth is expected to rise mildly in 2020, but international trade-protectionism, the current coronavirus outbreak in China, geo-political instability and the nature of the UK’s exit from the EU, all present risks to that outlook.

Market dynamics
During 2019, there have been divergent trends between UK businesses and households. For businesses, uncertainty for the domestic political and economic outlook translated into a second consecutive year of reduced investment spending and commercial real estate prices fell slightly. Low productivity growth remains a key challenge for the UK economy, however, the flip-side has been buoyant employment. Households continued to increase spending in 2019 as low unemployment boosted pay growth whilst softening global growth reduced inflation.

The UK housing market remained subdued through much of 2019, although falling mortgage rates and the election of a government with a strong Parliamentary majority appeared to be beginning to stimulate the market towards the end of the year. The level of housing transactions was broadly flat at around 20 per cent lower than the norm prior to 2008, with muted price growth.

The economic outlook appears to be improving. Nevertheless, in a long-term context growth is expected to remain subdued and interest rates low - core to that is the low rate of productivity growth, with the recent weakness of businesses’ investment spending suggesting a significant improvement is unlikely near-term. Uncertainty for some UK companies may persist in 2020 and drag on investment as the UK attempts to negotiate a comprehensive trade deal with the EU to a tight timescale. However, improved pay growth is likely to support households’ spending, and the likely fiscal stimulus is expected to provide some boost to the economy.

The fundamental drivers behind the subdued trends in the housing market are expected to remain in place - the high level of prices relative to incomes that constrains first-time buyer demand, and expectations that interest rates could rise from their current low level.

There are, or course, significant risks to this outlook. The growth-cycle in both of the world’s largest economies - US and China - is in its mature stage, and the coronavirus outbreak and ongoing trade war could complicate the task of policymakers in guiding growth towards a stable and sustainable level. Conversely, high asset prices and corporate debt levels in some countries could be vulnerabilities if an improvement in global economic growth and a resulting rise in interest rates causes unexpected shifts in currencies or herd behaviour in financial markets as shareholders change their appetite between different types of investments. Domestically, the future trading relationship with the EU remains uncertain, as does businesses’ response to that uncertainty.

Barring sudden shocks stemming from these challenges, the UK economy is expected to grow through 2020 to 2022 at around 1.5 per cent, slightly above the 1.4 per cent average across the past two years. The unemployment rate is expected to rise only a little from its current 44 year low. The outlook for the bank rate is uncertain, but capacity constraints and a fiscal boost may support a moderate increase in interest rates. House prices are expected to continue to grow mildly.

This picture of subdued but broadly stable growth is likely to be reflected across our markets. Consumer credit growth has slowed significantly over the past couple of years after a prior period of strong growth, but we expect that the slowdown has now run its course.

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.


Economy table

UK economic growth

UK unemployment rates

Economy table

UK housing market

Pay growth vs inflation


  • The UK financial services sector is expected to remain highly regulated
  • New regulation and market reviews continue to be issued, with further regulatory changes anticipated
  • Uncertainty remains around the impact of the UK’s exit from the EU on the existing regulatory and legal framework

Market dynamics
A number of regulatory changes have been implemented in the last 12 months including Open Banking, overdraft charging and the embedding of ring-fencing requirements with key areas of focus for 2020 as below:

Customer treatment
Fair treatment of customers remains a priority for the FCA, with particular focus on those in vulnerable circumstances as well as long standing customers.

Capital regulation
The Group continues to prepare for further regulatory capital developments in particular implementation of the final Basel III reforms.

LIBOR transition
The transition from LIBOR to alternative reference rates will mean changes to products and funding structures.

A number of other regulatory initiatives are in the pipeline which seek to address, amongst other things; operational resilience, climate change, General Insurance, revised Payment Services Directive (PSD2) requirements, MIFIDII and fraud.

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.


  • Customer expectations are being shaped by experiences outside of financial services, with convenience, choice and greater levels of personalisation becoming increasingly important
  • While customers want to be in control of their finances through digital channels, human interaction is still valued for more complex financial needs
  • Expectations on how companies engage with environment and societal issues are rising

Market dynamics
Consistent with recent trends, customer expectations continue to be shaped by their experience outside of financial services, with speed and convenience and greater levels of choice and personalisation, based on richer data insight, becoming more important in an increasingly competitive market.

As technological capabilities across the banking sector continue to become more sophisticated, customers also increasingly want and expect to be in control of their finances, with the ability both to see their accounts and monitor transactions across multiple providers. Against this, human interaction for more complex or emotive needs continues to be valued as part of a multi-channel servicing approach.

Similar to personal customers, business client expectations spanning speed, convenience and insight-driven personalisation are being shaped by experiences outside of financial services. Alongside this, smaller business customers are starting to look for support beyond their banking needs.

While not yet a major driver of behaviour and preferences, customers are becoming increasingly aware of societal and environmental issues, with rising expectations of how the companies they engage with are responding to these challenges.

Our response
We have a strong track record in providing our customers with the products and services they value, while also offering convenience and choice in the channel they choose to interact with us.

We remain committed to our multi-channel model, comprising the UK’s largest digital bank and branch network, and are focused on ensuring that this remains relevant to evolving customer preferences. As part of this, we are continuing to strengthen our digital capabilities, with a number of recent enhancements putting our customers more in control of their finances and resulting in strong digital customer satisfaction scores.

We are also investing in our branch and telephony channels to ensure that these are able to address our customers’ more complex needs more effectively, and continue to provide access to banking services for our more vulnerable customers.

Given our history and scale, we have a wealth of customer data and remain focused on using this valuable insight ethically and responsibly to develop products and services that are more personalised to our different customers’ needs.

Against the broader backdrop of increasing expectations and an evolving competitive environment, we cannot become complacent and need to continue to improve the customer experience to remain relevant and attractive to customers.

Economy table

Customer satisfaction

Adapting to changing behaviours


  • The pace of digital adoption and disruption continues to surpass expectations and is likely to increase further in the coming years
  • The use of new technologies is increasing efficiency within the financial services sector and delivering meaningful improvements to the customer experience
  • Cyber security and the protection and appropriate use of customer data remain important factors in retaining customer trust

Market dynamics
Digital adoption trends continue to surpass expectations, with the significant uptake driven by changes in demographics and an increasing similarity in customer behaviour across multiple geographies. As a result, we are seeing a significant change in how customers interact with financial services providers, while expectations of service are often being influenced by technology-led experiences outside of financial services.

The combination of heightened expectations and increasing levels of competition has resulted in greater levels of investment in technology across the sector, with banks placing increasing importance on delivering innovative new features for customers as well as continually upgrading and modernising back-office infrastructure. Banks are also regularly adopting new technologies such as machine learning and artificial intelligence to increase the effectiveness and efficiency with which more routine tasks are performed, while also using greater data driven insight to deliver an improved customer experience.

In addition, as the sharing of data becomes increasingly important to both banks and customers, there is a growing onus on how this is safeguarded. For example, the shift towards cloud technologies from in-house data storage can deliver a number of benefits for customers. These include increasing levels of insight and faster rates of product innovation, but open up the financial services sector to new cyber-related risks which must be carefully managed. In a period in which competition from digital-only providers has grown significantly, trust remains a key differentiator for established banks and therefore security and resilience remain areas of great importance.

Our response
In line with our position as the largest digital bank in the UK, we are investing heavily in technology to ensure that we can continue to deliver meaningful enhancements to the customer experience while also delivering organisational improvements in terms of responsiveness, insight and efficiency. Our technology spend is among the top quartile of global peers, with the amount spent in 2019 equivalent to 19 per cent of our operating cost base. Importantly, in excess of 75 per cent of this spend is focused on creating new capabilities and enhancing existing ones, with this investment critical to successfully delivering our modular approach to transformation.

We view our market leading efficiency position as a unique competitive advantage in this respect, as it creates capacity for further significant investment. This investment, such as in the increased use of intelligent systems and machine learning, is delivering improved processes and further productivity enhancements, and through this, is helping to future proof our business.

In 2019, we surpassed more than 1 million hours saved through the use of robotics since the launch of our latest strategic plan in 2018, creating significant capacity for our colleagues to focus their time on delivering tangible improvements to our customer experience. These improvements are being delivered in the form of new features, such as the roll out of location based searches to improve the identification of fraudulent payments, as well as by making better use of data for the benefit of our customers, such as harnessing the insights from robotics to improve credit decisioning.

We also continue to invest in the resilience and security of our systems, ensuring that customer data remains safe despite the significant pace of change in technological trends.

Our External Environment


  • Regulatory changes have resulted in increased competition across more traditional product lines, as excess liquidity is deployed within ring-fenced bank entities
  • The competitive landscape also continues to evolve with growth across a number of digital-only providers, while we are also seeing emerging signs of participation from large technology companies

Market dynamics
We continue to operate in an highly competitive environment, driven by regulatory changes, shifting customer behaviours and increasing levels of innovation across the sector.

Across our traditional business lines, ringfencing regulation has seen a number of our competitors deploy excess liquidity to support asset growth within the UK, specifically within mortgages where customer rates have in the last few years hit record lows. While this is beneficial for our customers, this has depressed margins across the UK banking sector and more recently has resulted in some smaller participants stepping back from the market.

Beyond this, digital-only providers have grown their share of the UK market within the past year. This growth has predominantly been driven by neo-banks that provide a more traditional customer offering alongside leading digital functionality and are able to target selected customer segments. This is supported by the emergence of marketplace models which enable these providers to collaborate with more specialist fintechs to provide a broader suite of products and financial services, both for personal and business banking customers.

In response, a number of traditional competitors have attempted to replicate the success of neo-banks by developing their own digital-only offerings, often under separate and newly created brand names. A number of international peers have also entered the UK market through digital only challengers, taking advantage of the supportive regulatory environment and increasing similarity in customer behaviours across multiple geographies.

Elsewhere, we have also started to see the first signs of large technology companies participating in financial services, often partnering with local incumbent banks across different geographies. While the scale of their future ambitions is uncertain at this stage, the power of their brand and large customer bases pose future disruption threats.

Our response
We continue to respond effectively to the increasingly competitive environment, supported by our significant reach and proven track record of providing products and services that our customers value with this underpinned by significant investment capacity.

Across our core markets such as mortgages, we have looked to prioritise value while maintaining share and supporting our purpose of Helping Britain Prosper. As marginal players have withdrawn from the market, we have more recently strengthened our position, including through the acquisition of Tesco Bank’s mortgage portfolio in September. Alongside this, we have also continued to invest in areas where we are under-represented, such as Insurance and Commercial Banking, in line with the commitments outlined at the start of this strategic plan.

In response to changes to the competitive environment from the ongoing shift in digital usage and new entrants, our multi-channel and multi-brand offering enables us to continue to effectively meet the varying needs of our diverse customer base. Our digital channel is now our most prominent, with 75 per cent of products now originated digitally and we operate the largest digital bank in the UK with 16.4 million customers and 10.7 million mobile app customers, while our customer satisfaction scores remain strong.

In addition, we remain committed to retaining the largest branch network in the UK. This allows our customers to interact with us in whichever way they prefer, while also providing a human touch point for more complex financial needs. Our network is also key to building and deepening our business banking relationships. We see these as unique competitive advantages, and combined with our ongoing commitment to innovation, provide us with a strong platform to maintain relevance and deepen relationships with our customer base.