Too big to fail, or too big to compete?

UK retailer Tesco is not alone in enjoying the benefits of 'safe haven' status as consumers turn away from distressed banks and move their assets to more trustworthy institutions.

The UK's Co-operative Bank - which last month posted a 70% rise in underlying profit for 2008 - is reporting a 123% annual increase in customers switching their current accounts from the large high street banks, such as HBOS, Lloyds and The Royal Bank of Scotland (RBS).

The data highlights a seven-fold annual increase in customers switching to The Co-op from Royal Bank of Scotland. And since details of Fred Goodwin's pension entitlement emerged last month, the number of RBS customers voting with their feet has doubled in the last month alone.

The increase in switching activity initially started last year, at the same time as when Lehman Brothers collapsed, and has now increased to the point where last month, the Co-op recorded the highest ever number of customers switching in.

Similar patterns are emerging all over Europe. In Switzerland, the banking arm of retailer Migros has witnessed a Sfr2.6 billion surge in retail deposits to about Sfr24 billion over the past year. Tesco itself is reporting a doubling in customer deposits.

It seems that the financial crisis has finally breached the barriers of current account inertia, which traditionally protected the retail banking sector from new competition. At the same time, the economics of opening a new bank have turned in favour of tech-savvy new entrants. Far-fetched ideas like opening a bank in the cloud, or even on a mobile phone, no longer seem so fanciful.

The stage is set for a new wave of greenfield competition. In this challenging environment, too big to fail could well be redefined as too big to compete.