Banks must be made to work harder for custom: CMA report
Britain's retail banks still do not have to "work hard enough" to attract customers, according to a report by the Competition & Markets Authority published today.
The CMA's provisional findings, which follow an 18 month inquiry undertaken in all parts of the UK, identify a number of competition problems in both the personal and small business banking sectors which mean that despite the Current Account Switch Service introduced in 2013, only 3% of customers actually moved their personal current account in 2014. Yet 57% of consumers have been with the same bank for more than 10 years, and 37% for more than 20 years.
Such low levels of customer switching, the CMA concludes, mean that banks are not put under enough competitive pressure, and new products and new banks do not attract customers quickly enough. There is a particular problem with small businesses, more than 50% of which open their business current accounts at the same bank where the owner has their personal account.
Customers with current accounts are faced with complex overdraft charges and limited information on product and service quality, which, along with limited effective comparison tools, makes it very difficult for customers to know what they are paying and to compare banks and products.
Many customers fear that switching their current account to a new bank will be complicated, time consuming and risky. Overdraft users are even less likely to switch than other users, yet heavy overdraft users, in particular, could save up to £260 a year if they switched. On average, current account users could save £70 a year by switching.
The investigation also discovered that accounts which are more expensive and below average quality are not losing customers to cheaper and better alternatives at the rate that would be expected in a well functioning market.
Although there have been some positive developments, with new entrants to the market, innovative products becoming available, and the digital innovations associated with online and mobile banking, the CMA concludes that because too few customers are switching, banks do not have strong enough incentives to work hard to compete for customers through better products or cheaper prices, and smaller or better banks find it hard to gain a foothold.
Potential remedies include:
- requiring banks to prompt customers to review the service they receive from their bank through receiving individual messages at certain "trigger points", such as a loss of service, closure of their local branch, unarranged overdraft charges, a change in the terms and conditions of their account, or in the case of small businesses, at the end of free banking periods;
- making it easier for consumers and businesses to compare bank products by upgrading the Midata industry online tool;
- requiring the creation of a new price comparison website for small businesses, which currently have nothing effective to fulfil this role;
- requiring banks to increase their funding for the promotion of the switching service; and
- requiring better sharing of information with credit reference agencies, banks and financial advisers, to make it easier for businesses to shop around for loans without multiple application form filling.
The CMA has provisionally decided not to push for the end of "free if in credit" accounts, as these are not thought to distort competition and the accounts give a reasonable deal to many customers.
Structural remedies, such as forcing the breakup of banks, have also been provisionally rejected as unlikely to be effective in addressing the competition concerns found.
Alasdair Smith, chairman of the investigation, said: "Despite some encouraging developments, particularly in the shape of challengers that have entered the market in recent years, for too long banks have been able to sit back and take their existing customers for granted.
"We don’t think that customers will truly benefit from a more competitive marketplace until they can compare accounts more easily and feel confident that they can switch without risk, and that is why our provisional remedies are aimed at giving customers control.
"We are considering a series of measures that will have a far-reaching impact on how banks operate and will empower account-holders to search for and switch to the account that suits them."
The CMA will now consult and hold detailed discussions with all interested parties on the findings and possible remedies ahead of publishing its final report in May 2016. Submissions in response to the provisional findings and notice of possible remedies are invited in writing by 20 November 2015.
Initial reaction from the consumer organisation Which? was that the proposals do not go far enough. "The CMA's own evidence is that consumers are disengaged from the banking market, so better information and nudges to switch will not be enough", executive director Richard Lloyd commented.