The regulator concluded that by switching personal current accounts, bank customers could save £70 a year, overdraft users could save on average £140 a year and heavy overdraft users could save on average £260 a year.
Why was the CMA investigating retail banking?
Competition concerns had been identified previously in reviews carried out by the Parliamentary Commission on Banking Standards as well as the Independent Commission on Banking. There were consistent concerns raised about the retail banking market:
- The level of concentration in retail banking
- The existence of high barriers to entry and expansion
- Difficulties for customers, both personal and business, in readily accessing, assessing and acting on information to make effective choices on providers and products
Both the ICB and PCBS recommended that the CMA carry out a market investigation by 2015 in light of these concerns. The CMA published their provisional findings in October 2015, and are due to publish their final report by April 2016.
During their investigation the CMA saw some evidence that banks with larger personal current account (PCA) market shares have higher average prices and/or lower quality; the four largest banks (LBG, HSBCG, RBSG and Barclays) in Great Britain accounted for approximately 70% of active PCAs.
They also found that despite variations in price and quality, market shares of personal current accounts among the major banks have remained broadly stable. This was due to lack of responsiveness by PCA customers to variations in the market.
For example, 57% of consumers have been with their PCA provider for more than 10 years, and 37% for more than 20 years, the CMA found. Low levels of customer switching means that banks are not put under enough competitive pressure, and new products and new banks do not attract customers quickly enough.
Other reasons for lack of engagement included:
- Lack of trigger points because PCAs have no contract end date – customers not required to periodically review product
- High levels of state satisfaction despite differences in price and quality
- For those in credit, PCAs are seen as a low cost product and perceived gains from switching are low
- Barriers to accessing and assessing information on charges and service quality – this requires the consumer to combine the information on different account and overdraft charges
- Price comparison websites play a limited role and quality of service information is currently not available
- Consumers perceive significant barriers to switching accounts despite introduction of Current Account Switching Service
Initiatives to improve competition
Increasing market competition is a key agenda for the Conservative government and it is aimed at giving consumers a better banking experience and a better deal. The government has given a strong emphasis on increasing market competition as they cite that by increasing competition consumers can benefit from increased and better access to financial products, lower prices and a better in branch experience.
Since 2013 the EU and UK governments have introduced a number of initiatives to improve competition in the retail banking market:
- The European Union Payment Accounts Directive
- 7 day current account switching service
These initiatives are aimed at improving transparency and comparability of fees, enabling consumers to choose more suitable products based on personal usage, and improve the switching process. The CMA report however found that Midata usage was low and not fully effective, and consumers perceive significant barriers to switching accounts despite introduction of CASS.
The CMA recommends that banks could prompt customers to switch providers at certain trigger points for example if their branch closes, overdraft charges change, or there are IT problems. Additional remedies suggested by the CMA focus to enhancing the Midata and CASS initiatives, raising awareness of the potential savings from switching, and enabling consumers to compare between providers on the basis of service quality.
Many have criticised the CMA for now going far enough. Which? executive director, Richard Lloyd, said “The CMA inquiry has to bring about better banking, but these proposals don’t go far enough. The CMA’s own evidence is that consumers are disengaged from the banking market, so better information and nudges to switch will not be enough”.
The CMA are now seeking views about the possible remedies that they have considered so far, as well as views that have not yet been considered. The final report is expected in April 2016.