We’re still too loyal to big banks, says study

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BANK customers are set to remain loyal to the much-maligned high street banks despite a fresh challenge to the status quo in the current account market, new research suggests.

The Post Office this week launched three new accounts in a pilot scheme in East Anglia with the aim of later rolling them out across the UK (see box 1 for more details). It hopes to end the dominance of the big five banks in a current account market in which switching levels are typically just 5 per cent or so a year.

Between them HSBC, Lloyds, Royal Bank of Scotland/NatWest, Barclays and Santander provide 85 per cent share of the current accounts open in the UK. The Office of Fair Trading (OFT) warned earlier this year that the current account market is not “working well for consumers or the wider economy”. However, the OFT announced this week that it would not be referring the current account market to the Competition Commission.

One reason it gave was the introduction later this year of rules making it easier to switch account. September will see the introduction of a new guarantee under which banks and building societies will be given a maximum of seven working days to complete current account transfers (although there’s no requirement for cards and PINs to arrive in that time). The process currently takes an average of about 18 days.

The market looks set to be shaken up further by the arrival of the Post Office. With more outlets than all the UK banks combined, it would appear to pose a real threat to the hegemony of the big five.

It is just one of several brands entering the market. M&S Money launched its current account and in-store branches last summer, while Tesco and Virgin Money are expected to unveil their current accounts when the new switching process is in place.

But research obtained by The Scotsman suggests it is going to take more than new products and rule changes to get people switching their main current account.

A survey by research company Consumer Intelligence suggests the changes taking effect over the coming months may do little to boost switching levels.

Of those that have already switched account, just 13.7 per cent did so because there were better products available elsewhere.

Of those that haven’t switched and who were asked what would make them consider doing so, fewer than one in three said they would leave their existing provider because they wanted a better deal.

Just 11 per cent said they would be persuaded to switch by the seven-day guarantee taking effect in September.

Instead the main reasons given for considering a change of current account depend on the actions of the existing provider. The expected exodus of customers from the big high street names in the wake of the financial crisis failed to materialise, with the exception of a few spikes in switching (to the likes of the Cooperative) following events such as the Libor crisis.

But 64 per cent of people told Consumer Intelligence that they would be very likely to move if their existing bank started charging them to use cash machines.

Banks that introduce obligatory charges on their current accounts could also lose a big chunk of custom – just over eight in ten respondents would be either very or fairly likely to change provider if this were to happen.

Negative elements, such as charges and fees, are the main factors that will make people change their current account, said David Black, banking specialist at Consumer Intelligence

“But this leads on to another issue: there are so many different overdraft charging structures that it is virtually impossible for a consumer to fathom out which account offers the best deal for their particular circumstances if they stray into overdraft,” he added.

There are some product features that could get more of us to consider changing to a different current account, however. More than a fifth would be persuaded to switch if a particular mortgage deal was only available if they moved their current account to that provider.

The low interest rate environment may also be a factor, with almost four in ten respondents saying they would consider a switch to a current account with a better interest rate on credit balances.

Eyecatching overdraft rates are well down the priority list, perhaps surprisingly – just 12 per cent said they would be very likely to switch if another bank offered a more attractive overdraft deal.

But innovation could yet prompt more people to think about leaving their existing bank, according to Andrew Hagger of Moneycomms.co.uk. He pointed to the success of the 123 account from Santander. This charges a £2 monthly fee but features cashback on some direct debit payments and a decent rate of interest on credit balances.

“It has opened 1.2 million new 123 current accounts in the last 14 months and attracted over £4 billion in new credit balances – this is because the account offers ongoing value, not just a one-off upfront payment or a promotional credit interest rate that only lasts 12 months,” said Hagger.

Black agreed that innovation may be the key, suggesting that Tesco has the ability to offer consumers something different to the high street banks.

“Tesco’s impending launch of a current account could provide the greatest challenge to existing incumbents if, for example, it 
harnesses its Clubcard rewards scheme with an attractive free-in-credit current account,” he said.

But the fact remains that most people tend to remain loyal to their current account provider,” said Black. “It would take some fundamental change, such as the end of free-in-credit banking, to provide the impetus to result in a substantial increase in switching levels.”

How to switch current accounts in five simple steps

A NEW seven-day switching guarantee taking effect in September is aimed at encouraging more people to switch current account.

However, the process has already improved significantly in recent years. Here are the steps to take in changing current account provider:

1) Decide which current account you want to open. Compare different accounts according to your needs. For example, if you are regularly overdrawn search for those with the lowest overdraft rates; if you are not, look for accounts that pay in-credit interest. If you go for a packaged account, make sure you are eligible for all of the benefits you are paying for and that you would use them. Comparison sites such as www.moneysupermarket.com and www.moneyfacts.co.uk may be useful here.

2) Go to the local branch of the provider to which you want to switch, armed with a photo of yourself and a utility bill or up-to-date bank statement to prove your identity and address. It’ll also help to take the last three or six months of bank statements to prove that you’re capable of managing your account sensibly, if you need an overdraft facility. Find out how long it will take and ask for a switching guide that explains the process.

3) Leave it to the new provider to contact your existing one and arrange for your regular payments to be transferred across. It will agree a date with you to switch the balance on your account.

4) You should get a new debit card, Pin, cheque book and other details before the old account is closed so that you don’t lose access to your money at any point. Current account providers must ensure that customers aren’t left out of pocket if they incur costs due to problems in transferring direct debits or salary payments. Your new provider may give you an interest-free overdraft until the process is complete.

5) Tell your employer and anyone else that pays you of your new bank, account number and sort code. Double-check that the old account has been closed. Just 23 per cent of providers contact a customer’s existing bank or building society to have

their current account shut down after they have made a switch, according to Defaqto.

Post Office set to enter market

The Post Office is offering three different current accounts in a pilot scheme that it hopes will act as a launch pad for a challenge to the high street banks.

It announced in April that it eventually plans to offer current accounts through its 11,500-strong network of UK outlets, in a bid to boost competition in the market.

The products will be operated in partnership with Bank of Ireland, which already operates the Post Office’s savings and mortgages proposition. Of the three accounts unveiled this week, two have monthly fees.

The version that doesn’t levy a charge is the Standard account, which offers a debit card and a competitive 14.9 per cent overdraft rate.

The Packaged account, costing £8 a month, comes with benefits including vehicle breakdown cover and European multi-trip travel insurance and an overdraft rate set again at 14.9 per cent.

The Control account is aimed at low income customers, including those who may be excluded from banking services elsewhere. But while there are no charges for unpaid direct debits and standing orders, the £5 monthly fee on this account has attracted criticism.

Richard Lloyd, executive director of consumer group Which?, said: “The monthly charge for the new basic bank account might put off people who need this service the most, and the Post Office should think again if they find evidence of this.”

However Kevin Mountford, head of banking at Moneysupermarket, said the accounts would appeal to the traditional customer base of the Post Office.

“As you would expect from a trusted brand such as the Post Office, these accounts offer simplicity and transparency, and with a large branch network, we could see it become a serious challenger in the current account market by the time of the national roll out to all 11,500 branches in 2014,” said Mountford.