Read a companion piece, "Is Britain's banking system competitive enough?", here
Since the turn of the millennium there have been repeated competition inquiries into the retail and small business banking markets, all of which have noted almost universal inertia among customers and very low levels of shopping around and switching. Even after the introduction in September 2013 of the guaranteed seven-day Current Account Switch Service (CASS), only 3 per cent of consumers change their current account each year.
Does limited current account switching indicate that the UK does not have a properly competitive market for basic consumer and small business banking services? And if so, what factors are causing this competition gap and how should policymakers and regulators try to address them? At the recent Labour and Conservative party conferences, Prospect hosted roundtable discussions in partnership with Bacs, the non-profit organisation that runs CASS, to explore these questions.
One of the key problems that speakers identified in the consumer banking market was the lack of price transparency caused by cross-subsidies between different banking products: many current accounts are free if customers stay in credit, but the cost of providing them is partly underwritten by income from charges and fees on overdrafts, especially unauthorised overdrafts. Labour MPs Helen Goodman and Rushanara Ali both argued strongly that banks should be forced to make clear what consumers are paying to access current account services. The current lack of cost transparency is “a market failure that the state and the regulators need to look at again carefully,” said Ali.
Although the demise of free current account banking would be unpopular with many of those who presently benefit from it, Chris Pond of the Financial Inclusion Commission believed that the gains to be had from greater cost transparency would be worth the price. “On the whole it would be much more transparent if people paid a relatively small fee that reflected some of the cost of providing those services, and in doing so they would be able to make much easier comparisons between one bank account and another in terms of costs.”
The expectation that current account banking should be free was also accused of keeping alternative providers out of the market. “The result is that the current account in the credit union sector has for the moment gone. We can’t compete if we can’t charge, so we can’t get in,” said Paul Anthony Jones of Liverpool John Moores University, who sits on the board of Manchester Credit Union.
Against that, it was pointed out that although small businesses are often offered free current account banking for a period, typically 18 months, they tend to pay a monthly fee for this service after the offer expires and so do not benefit from long-term free banking. But even so, only 4 per cent of small businesses switch current accounts each year, suggesting that free banking may not be the most important barrier to competition.
David Core, Head of Strategy and Regulation at Bacs, said that although Bacs’ research indicated that confidence among consumers in the switching system was high, at about 75 per cent, among small businesses it was about 20 percentage points lower. “It’s one of our particular challenges to understand why,” he added. “Although about 70,000 businesses have used CASS to switch, we think the business market is more complex.”
Martin McTague, Policy Director of the Federation of Small Businesses, revealed that he had switched his account using CASS. The switching mechanism itself had worked very smoothly, he said. “But as soon as you go into the new bank they put you through this tortuous process of reassessing you for anti-money laundering problems and so on, and that message is going back over and over again to other FSB members: ‘If you really don’t have a reason to do it, don’t do it.’"
Overdraft funding—a critical product for many small business owners—was another key issue, he said. “SMEs with overdrafts are concerned that if they change banks they’ll have to renegotiate their overdraft facility with someone they don’t know. I think that’s a massive brake on switching.”
In the consumer market, overdraft users were the group most likely to save money by switching, explained Richard Piggin, Campaigns Manager at Which?, but they were also the group least likely to do so. “They are the disengaged ones and banks know this so they don’t have to do anything to keep them, and they’re making a lot of money from them. The Competition and Markets Authority found that something like 14 per cent of their revenue comes from charges for unauthorised overdrafts.”
The CMA’s response to the apparent lack of competition among retail banks revolves largely around increasing use of digital technologies to make it easier for consumers to work out which banks can offer them the best deal, based on their personal pattern of current account use. Among the remedies it proposes is a so-called “Open Banking API,” effectively a way for consumers to share their personal banking data securely with other providers to obtain competing prices. But although this approach would give consumers access to the information they need to shop around, other crucial elements in the process were still lacking, argued Michelle Highman, Chief Executive of The Money Charity. Even once they were able to use their personal account data, she said, they still needed the tools to be able to see what the rest of the market could offer them and enough of an incentive to go to the trouble of making the switch.
More broadly, the problem with a technology-led approach to banking market reform was that it would fail to meet the needs of a large group of less engaged customers. Many would not have the confidence or interest in using online tools to help them get a better deal: even after a decade or more of competition in the utility markets via price comparison websites, some 43 per cent of customers had never switched their supplier, said Rushanara Ali.
But even though serious doubts remained among our roundtable speakers on the likely effectiveness of the CMA’s proposed approach to generating greater competition among banks, Anne Pieckielon, Director of Product and Strategy at Bacs, suggested that making it easier to switch bank accounts was producing some promising signs.
The mix of current account types was shifting away from “free if in credit” and so-called “packaged” accounts that bundle in discounted services such as travel insurance. Instead, current accounts that offer rewards and incentives to switch were gaining ground. “The number of ‘free if in credit’ accounts has fallen 17 per cent in the past year alone,” she said. “The profile of accounts is starting to change as a result of switching enabled by CASS – maybe not quickly enough for some people but it is changing. There’s a more competitive landscape.”
Rob McNamara, Public Affairs Manager at MoneySupermarket, agreed: “[Current account switching] is by no means the biggest part of our business but we’ve noticed that with more products coming on to the market more people are coming to the site. It’s been quite tangible for us.”
With the support of Bacs, Prospect hosted a series of invite-only roundtable discussions at the 2016 Party Conferences on competition in banking, customer awareness and market participation in order to determine what more can be done to make the current account switching market more competitive. The discussion was chaired by Andy Davis, Finance Editor for Prospect. Speakers included: Rushanara Ali MP, APPG on Inclusive Growth APPG; Helen Goodman MP, Treasury Select Committee; Alan Mak MP, Vice-chair, Financial Markets and Services APPG; David Core, Scheme Strategy and Regulation, Bacs; Chris Dunne, Payment Services Director, Vocalink;Michelle Highman, CEO, Money Charity; Dr Paul Anthony Jones, Director, Research Unit for Financial Inclusion (RUFI), Liverpool John Moore's University; Anne Pieckielon, Director of Product and Strategy, Bacs; Chris Pond, Commissioner, Financial Inclusion Commission; Martin McTague, Policy Director, Federation of Small Businesses; and Dan Morgan, Head of Policy and Regulation , Innovate Finance.
Since the turn of the millennium there have been repeated competition inquiries into the retail and small business banking markets, all of which have noted almost universal inertia among customers and very low levels of shopping around and switching. Even after the introduction in September 2013 of the guaranteed seven-day Current Account Switch Service (CASS), only 3 per cent of consumers change their current account each year.
Does limited current account switching indicate that the UK does not have a properly competitive market for basic consumer and small business banking services? And if so, what factors are causing this competition gap and how should policymakers and regulators try to address them? At the recent Labour and Conservative party conferences, Prospect hosted roundtable discussions in partnership with Bacs, the non-profit organisation that runs CASS, to explore these questions.
One of the key problems that speakers identified in the consumer banking market was the lack of price transparency caused by cross-subsidies between different banking products: many current accounts are free if customers stay in credit, but the cost of providing them is partly underwritten by income from charges and fees on overdrafts, especially unauthorised overdrafts. Labour MPs Helen Goodman and Rushanara Ali both argued strongly that banks should be forced to make clear what consumers are paying to access current account services. The current lack of cost transparency is “a market failure that the state and the regulators need to look at again carefully,” said Ali.
Although the demise of free current account banking would be unpopular with many of those who presently benefit from it, Chris Pond of the Financial Inclusion Commission believed that the gains to be had from greater cost transparency would be worth the price. “On the whole it would be much more transparent if people paid a relatively small fee that reflected some of the cost of providing those services, and in doing so they would be able to make much easier comparisons between one bank account and another in terms of costs.”
The expectation that current account banking should be free was also accused of keeping alternative providers out of the market. “The result is that the current account in the credit union sector has for the moment gone. We can’t compete if we can’t charge, so we can’t get in,” said Paul Anthony Jones of Liverpool John Moores University, who sits on the board of Manchester Credit Union.
Against that, it was pointed out that although small businesses are often offered free current account banking for a period, typically 18 months, they tend to pay a monthly fee for this service after the offer expires and so do not benefit from long-term free banking. But even so, only 4 per cent of small businesses switch current accounts each year, suggesting that free banking may not be the most important barrier to competition.
David Core, Head of Strategy and Regulation at Bacs, said that although Bacs’ research indicated that confidence among consumers in the switching system was high, at about 75 per cent, among small businesses it was about 20 percentage points lower. “It’s one of our particular challenges to understand why,” he added. “Although about 70,000 businesses have used CASS to switch, we think the business market is more complex.”
Martin McTague, Policy Director of the Federation of Small Businesses, revealed that he had switched his account using CASS. The switching mechanism itself had worked very smoothly, he said. “But as soon as you go into the new bank they put you through this tortuous process of reassessing you for anti-money laundering problems and so on, and that message is going back over and over again to other FSB members: ‘If you really don’t have a reason to do it, don’t do it.’"
Overdraft funding—a critical product for many small business owners—was another key issue, he said. “SMEs with overdrafts are concerned that if they change banks they’ll have to renegotiate their overdraft facility with someone they don’t know. I think that’s a massive brake on switching.”
In the consumer market, overdraft users were the group most likely to save money by switching, explained Richard Piggin, Campaigns Manager at Which?, but they were also the group least likely to do so. “They are the disengaged ones and banks know this so they don’t have to do anything to keep them, and they’re making a lot of money from them. The Competition and Markets Authority found that something like 14 per cent of their revenue comes from charges for unauthorised overdrafts.”
The CMA’s response to the apparent lack of competition among retail banks revolves largely around increasing use of digital technologies to make it easier for consumers to work out which banks can offer them the best deal, based on their personal pattern of current account use. Among the remedies it proposes is a so-called “Open Banking API,” effectively a way for consumers to share their personal banking data securely with other providers to obtain competing prices. But although this approach would give consumers access to the information they need to shop around, other crucial elements in the process were still lacking, argued Michelle Highman, Chief Executive of The Money Charity. Even once they were able to use their personal account data, she said, they still needed the tools to be able to see what the rest of the market could offer them and enough of an incentive to go to the trouble of making the switch.
More broadly, the problem with a technology-led approach to banking market reform was that it would fail to meet the needs of a large group of less engaged customers. Many would not have the confidence or interest in using online tools to help them get a better deal: even after a decade or more of competition in the utility markets via price comparison websites, some 43 per cent of customers had never switched their supplier, said Rushanara Ali.
But even though serious doubts remained among our roundtable speakers on the likely effectiveness of the CMA’s proposed approach to generating greater competition among banks, Anne Pieckielon, Director of Product and Strategy at Bacs, suggested that making it easier to switch bank accounts was producing some promising signs.
The mix of current account types was shifting away from “free if in credit” and so-called “packaged” accounts that bundle in discounted services such as travel insurance. Instead, current accounts that offer rewards and incentives to switch were gaining ground. “The number of ‘free if in credit’ accounts has fallen 17 per cent in the past year alone,” she said. “The profile of accounts is starting to change as a result of switching enabled by CASS – maybe not quickly enough for some people but it is changing. There’s a more competitive landscape.”
Rob McNamara, Public Affairs Manager at MoneySupermarket, agreed: “[Current account switching] is by no means the biggest part of our business but we’ve noticed that with more products coming on to the market more people are coming to the site. It’s been quite tangible for us.”
With the support of Bacs, Prospect hosted a series of invite-only roundtable discussions at the 2016 Party Conferences on competition in banking, customer awareness and market participation in order to determine what more can be done to make the current account switching market more competitive. The discussion was chaired by Andy Davis, Finance Editor for Prospect. Speakers included: Rushanara Ali MP, APPG on Inclusive Growth APPG; Helen Goodman MP, Treasury Select Committee; Alan Mak MP, Vice-chair, Financial Markets and Services APPG; David Core, Scheme Strategy and Regulation, Bacs; Chris Dunne, Payment Services Director, Vocalink;Michelle Highman, CEO, Money Charity; Dr Paul Anthony Jones, Director, Research Unit for Financial Inclusion (RUFI), Liverpool John Moore's University; Anne Pieckielon, Director of Product and Strategy, Bacs; Chris Pond, Commissioner, Financial Inclusion Commission; Martin McTague, Policy Director, Federation of Small Businesses; and Dan Morgan, Head of Policy and Regulation , Innovate Finance.
