The long-awaited report by the Competition and Markets Authority (CMA) into the UK retail banking sector was finally published this week (9/8/16). The report looked into the provision of current accounts for personal customers, and banking services for small businesses – both sectors being dominated by the ‘Big Four’ banks (HSBC, Lloyds, Barclays and RBS.)
While the CMA noted some ‘positive developments’ in the sector, including increased opportunities for digital-only banks, and new payment services, it concluded that significant competition issues still exist in a market which is ‘highly concentrated’ and dominated by ‘older and larger’ banks.
The CMA reported that existing banks do not have to work hard enough to win and retain customers, which effectively stifles innovative and significantly reduces competition. Banks will only tend to innovate, or improve the quality of their services, when they need to attract new business, or when there is a clear threat that they might lose existing customers. Neither of these two conditions are met in the existing market for retail banking.
The CMA identifies some specific characteristics of the market that limit competition, including:
The CMA identified several significant barriers to entry for new retail banks resulting from the advantages that existing banks have over potential entrants, including:
While the CMA rules out breaking-up existing banks, given that it would be too complex and lengthy a process, it proposes a series of measures to improve competition.
The retail banking industry should use of latest technology to develop apps which enable customers to have all their banking data in one place, and which will improve the quantity and quality of information available about alternative banking products. This will enable customers to make more informed choices, and give new entrants a chance to enter the market place through access to this technology.
Banks must publish core indicators of service quality, which will be made available through the new app.
Banks will be forced to send customers reminders about specific events, such as information about banks closures, and annual dates. The Financial Conduct Authority (FCA) has been asked to research which behavioural prompts are most likely to change behaviour - for example, banks could be forced to inform customers that ‘25,000 people this year changed their current account’.
Retail banks will be forced to making switching even easier than it currently is by adopting Account Number Portability (ANP). This will be a similar system as the unique candidate identifier (UCI) code allocated to all UK students which they take with them when they change schools or sit different examination boards.
In addition, all banks will allow customers to get access to their account statements even after closure, which, for business, is necessary for completing accounts, or obtaining loans.
The CMA looked closely at the overdraft market, where switching is very rare, and concluded that high overdraft charges were the result of weak competition in the market. To limit the negative effect of this the CMA proposed that banks should let customers know when they are about to go overdrawn, and allow grace periods where borrowers can avoid incurring charges.
In addition, the CMA proposed a new Monthly Maximum Charge (MMC) which places a cap on unarranged overdraft charges. The CMA asked the FCA to identify ways for overdraft users to shop-around.
In addition to the other measures listed above, the CMA also recommended the establishment of a new ‘comparison service’ for small businesses, and the adoption of a standardised account opening procedure for new business accounts.
Small businesses will also be allowed to check on rates from various banks without it affecting their creditworthiness – a process called ‘soft searching’.
All these elements will come into force by the Summer of 2018.