Banks not working hard enough for customers, says CMA

Banks are not being put under enough competitive pressure in the current account market – and customers could typically save £70 by switching – a watchdog’s investigation has found.

The CMA said banks do not have to work hard enough to win customers
The CMA said banks do not have to work hard enough to win customers

The Competition & Markets Authority (CMA) said that “banks do not have to work hard enough to compete for customers” as it released its provisional findings of a probe into the dominance of the big banks in the sector,

It found that 57 per cent of consumers have been with their account provider for more than ten years and 37 per cent for more than 20 years.

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Customers fear that switching their current account to a new bank will be complicated, time-consuming and risky, the CMA said.

The watchdog found that customers with an overdraft are less likely to switch their personal current account than other users.

Heavy overdraft users in particular could save themselves up to £260 a year if they switched, the investigation found, while on average current account users could save £70 a year by switching.

It said that overdraft charges are “complex” and information on product service and quality is limited, making it hard for customers to compare products.

The CMA also said there is a particular problem with SME (small and medium enterprise) customers opening their business current accounts (BCA) at the same bank where they have their personal current account, then sticking with the same bank for their business loans.

It said the lack of competitive pressure in SME banking is highlighted by the fact that more than 50 per cent of start-ups looking for an SME account choose the bank with which they have a personal current account, more than 90 per cent stay with their BCA when the initial free banking period comes to an end, and around 90 per cent then go to their BCA provider when they are looking for business loans.

Matthew Fell, interim chief policy director at the CBI, said: “There are positive changes already taking place in the banking sector, with lots of challenger banks entering the market, a new and reliable switching service and a significant take up of digital banking offering 24/7 access. The CMA should take care so as not to knock this good progress off course.

“We want the CMA and regulators to focus on measures that help challenger banks scale-up, by levelling the playing field on the cost of capital whilst helping to publicise the switching service.”

Potential remedies being suggested by the CMA to help include:

Requiring banks to prompt customers to review the service they receive from their bank through receiving individual messages at certain “trigger points”. These could include a loss of service, closure of their local branch, unarranged overdraft charges or a change in the terms and conditions of their account. In the case of SMEs, a key trigger point could come at the end of free banking periods.

Making it easier for consumers and businesses to compare bank products by upgrading Midata, a UK government-backed online tool that allows consumers to access their banking data from their bank and compare their existing deal with other accounts that may suit their personal needs better. An improved Midata could have a “radical impact” on consumer choice in retail banking markets, the CMA said.

The creation of a new price comparison website for SMEs – currently nothing effective exists to fulfil this role, the investigation found.

Requiring banks to help raise public awareness of, and confidence in, switching bank accounts, through increasing their funding for a widespread and sustained advertising campaign.

Requiring better sharing of information with credit reference agencies, banks and financial advisers – making it easier for SMEs to shop around for loans and cutting out the need for multiple application form-filling.

Responding to the CMA’s findings, Benny Higgins, chief executive of Edinburgh-based Tesco Bank, said: “It is critically important that customers are well informed about how much they can gain from switching accounts, and we welcome the CMA’s proposals to address this significant issue. We are committed to doing everything we can to make it easier for customers to understand the value of their account.

“We are the only bank in the UK to highlight foregone interest on our customers’ statements, and this week we became the first challenger bank to join the Midata scheme. The CMA has an opportunity to be a catalyst for meaningful change and we look forward to working with them as they finalise their recommendations.”

The watchdog said previously that there has been “very little movement” in the market shares of the four largest banks – Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland.

It said that the big four banks collectively supply more than three-quarters of the personal current account market in the UK, as well as more than 85 per cent of BCAs and 90 per cent of business loans.

The CMA is expected to publish a final report into the market in April.

Alasdair Smith, chairman of the retail banking investigation, said: “We think customers need to be put in charge of their banking.

“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.”

A seven-day current account switching service was launched in 2013 to take the hassle out of moving banks. But the CMA said that, while the service is functioning reasonably well, awareness of it is low. Only 3 per cent of customers switched their personal current account in 2014 and just 16 per cent looked at alternative accounts.

The investigation also found that accounts which are expensive are not losing customers to cheaper and better alternatives at a rate that would be expected in a well-functioning market.

Because too few customers are switching, banks do not have strong enough incentives to work hard to compete for customers through better products and cheaper prices and smaller or better banks find it hard to get a foothold, the CMA found.

Paul Pester, chief executive of challenger bank TSB, said: “The CMA’s provisional findings are a solid first step in breaking the stranglehold of the big banks and putting customers in control at last.

“We agree with the CMA that there is a significant lack of competition in the UK retail banking market which has been fuelled by a lack of transparency, low levels of switching and a switching service that doesn’t cater for all UK consumers.”

He added: “In a truly competitive market, consumers will be offered genuine choice and a level of transparency they’ve never seen before, so they can make informed choices and switch with ease. The switching service needs to be improved for those who are trapped by their current provider and the provision of a standard format monthly bill that spells out the true cost of banking should be mandatory. Only then will we see customers being able to vote with their feet.”