Banks should be pushed to improve competition, CMA proposes

Further proposed measures to encourage retail customers to move from one bank to another have been published by the Competition & Markets Authority.

In its provisional decision on remedies, the CMA outlines a wide ranging package to tackle the issues hindering competition in personal current accounts and in banking services for small and medium-sized enterprises. It also proposes new protections for overdraft users.

Despite the improved ease of switching from one bank to another, nearly 60% of personal customers have stayed with the same bank for over 10 years and over 90% of SMEs get their business loans from the bank where they have their current account.

The CMA believes this is due to bank customers finding it difficult to work out if they are getting good value. Bank charges are complicated and opaque, and many customers think it is difficult and risky to change banks. This means that competitive pressures are weak, so banks do not need to work hard enough on price or quality of service.

It considered whether the largest banks should be broken up, but it concluded that this would not address the fundamental competition problems if there remained a lack of transparency on fees and charges.

Another issue was whether to get rid of "free if in credit" current accounts. Even though such accounts are not really "free", they do work well for many customers, and the CMA took the view that banning particular products would simply take away choice and risk the overall cost of accounts rising, not falling.

To transform the market the CMA believes banks instead need to be made to provide their customers with the right information so that they can easily find out which provider and type of account offers best value for them. The CMA also proposes to push the development of new online comparison tools and improve the current account switch service (CASS), to make switching banks more straightforward and give customers more awareness of, and confidence in, the process.

With overdraft users representing nearly half of personal customers, the CMA’s proposals include new measures targeted at overdrafts, with a particular focus on users of unarranged overdrafts. In 2014, £1.2bn of banks’ revenues came from unarranged overdraft charges.

The CMA proposes requiring banks to set a monthly maximum charge for unarranged overdrafts on personal current accounts. Customers may not even be aware when they go into unarranged overdraft or realise the costs they are incurring, so the CMA also wants banks to alert people when they are going into unarranged overdraft, and give them time to avoid the charges.

It also wants to harness the big technological changes that are happening in banking, to empower customers to compare and switch accounts. The CMA is proposing to require banks to move swiftly to introduce an open API (application programming interface) banking standard. This will enable personal and SME customers to share their unique transaction history safely and securely with other banks and trusted third parties. This will enable bank customers to click on an app, for instance, and get comparisons tailored to their individual circumstances, directing them to the bank account which offers them the best deal.

Further, the CMA proposes that banks should be made to prompt their customers regularly to check that they are getting good value from their banking provider. When these prompts direct customers to digital comparison services which give tailored price-comparison and service quality advice, the foundation has been laid for a major change in the retail banking sector.

Such a package of changes could bring benefits to bank customers to the tune of £1bn over five years, the CMA estimates. Personal customers who switch to a cheaper product for them could save an average £116 annually, ranging from £89 on average for customers who do not use an overdraft, to £153 on average for overdraft users.

Alasdair Smith, chair of the Retail Banking Investigation, commented: "For too long, banks have been able to sit back and not work hard enough for their personal and small business customers. We believe the strong and innovative package of measures we are proposing will give customers the information and tools they really need to get a better deal out of the banks. They will also protect those who fall into overdraft from being stung with unexpected fees.

"New entrants into a market are an important source of competition and innovation, and we are well aware of the current barriers to challenger banks in UK retail banking. What’s really holding them back is their ability to highlight to customers how new offerings compare with their current deal. Our package of banking reforms will help new competitors get a stronger foothold in a market which is of vital importance to the whole economy."

Click here to access the full report. The CMA invites submissions in writing by 7 June. It will publish its final report on the retail banking market investigation by 12 August 2016.