The Competition and Markets Authority (CMA) has found that competition between banks in the retail banking sector is not as meaningful as it should be with low levels of customer switching being the key feature fostering the lack of competition.
The CMA's provisional findings in its retail banking market investigation (published 22 October 2015) relate to the personal current account (PCA), small and medium-sized enterprise (SME) business current account (BCA), and SME lending markets in Great Britain and Northern Ireland.
The CMA identified an adverse effect on competition in the PCA and SME BCA markets as a result of:
- low customer engagement;
- a lack of information and effective account comparison tools;
- low levels of customer switching (over the past three years only 8% of PCA customers switched PCA accounts, which compares to 31% of energy switching levels); and
- advantages held by incumbent providers in the provision of PCAs in Great Britain and Northern Ireland.
With such weak competitive constraints on established banks, new and smaller banks cannot easily expand or compete effectively, leading to little incentive on established banks to compete on price, quality and innovation.
The CMA's investigation found that those who regularly use an overdraft facility are particularly impacted (overdraft charges are complex and information on these charges is generally only available through monthly bank statements, making it harder for consumers to compare the costs). The CMA calculates that heavy overdraft users could save up to £260 per year by switching.
The CMA has also identified competition problems in SME lending. Again, weak customer engagement is responsible for limiting banks' incentives to compete on price, quality and innovation and for presenting a barrier to the growth of new entrants and small banks.
Organic links between PCAs, SME BCAs and SME lending add to the low level of competition in the SME sector: Typically, SMEs open their BCA at the same bank that provides their PCA and then also use that bank for their business loans.
It is not all bad news, the CMA did identify a number of positives. New banks have entered into PCA and SME banking, innovative products are being introduced, particularly with regards to online and mobile banking, and new tools such as ;'Midata' and 'CASS' may improve searching and switching in the future.
However, the CMA believes that more must be done to stimulate customer switching and incentivise banks to compete harder in the retail banking sector and it has published a number of possible remedies to address this. These include:
- Requiring banks to remind consumers and SMEs to review the service they receive at certain 'trigger points' e.g. a loss of service, closure of local branch, unarranged overdraft charges or changes to terms and conditions and, for SMEs, this would include the end of free banking periods.
- Upgrading Midata, the industry tool that allows customers access to their banking history instantaneously, allowing them to use that data to effectively use price comparison websites.
- Requiring a new price comparison website for SMEs.
- Requiring banks to raise public confidence in switching bank accounts through improving the CASS service and advertising its availability.
- Requiring improved sharing of information with credit reference agencies, banks and financial advisers, thereby facilitating SMEs to compare loans.
The CMA has declined to recommend stronger possible measures, such as forcing banks to make divestments and requiring the end of free-in-credit accounts, citing the lack of customer switching as the main underlying issue identified.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.