The preliminary outcome of an 18-month investigation into the banking sector will be announced on Thursday. Launched at a time when Labour was agitating for new banks to be created, the investigation by the Competition and Markets Authority is the latest of 10 into the sector in about 15 years. The outcome is eagerly awaited by the banking industry and consumer groups, although the final verdict will not be delivered until next April.
What is the Competition and Markets Authority investigating?
The banks generate £8bn a year of revenues from personal current accounts and £2bn a year from small business accounts. The watchdog is concerned about the stranglehold the big four – Lloyds Banking Group, Royal Bank of Scotland, HSBC and Barclays – have on the high street. The investigation was launched in July 2014, six months earlier than had been envisaged by Sir John Vickers and his independent commission on banking, which raised concerns about competition in banking in 2011.
What is the problem?
According to statistics published by the competition watchdog 18 months ago, the big four banks have a 77% market share of 65m active current accounts. New banks such as Metro and Tesco have a 5% market share, although TSB represents 4.2% of this. Customer satisfaction is low, yet only 3% of customers move each year.
And what are the numbers for small business accounts?
The big four have an 85% share of accounts and 90% of loans. There has been one entrant into full service SME banking – Metro Bank – in recent years even though satisfaction rates remain low among customers.
Did the big four do anything to head off the latest review?
They tried. But the CMA rejected proposals to set up a comparison website to improve transparency, establish new account opening standards to make it easier for SMEs switching banks to open accounts and do more advertising to encourage customers to switch.
What has the review been looking at?
A number of areas have been considered, including the barriers to setting up new banks, the importance of branch networks, the difficulty of switching current and business accounts between banks and the low level of transparency about products.
What are the barriers to entry?
Banks need permission from the Bank of England’s regulation arm to take deposits from customers. The process takes time, although the government has taken steps to speed this up. The competition watchdog is also looking at branch networks. The CMA said in a report in July 2014: “Local bank branches remain valued by customers, despite the recent huge increase in online and mobile app banking and the decrease in the volumes of branch usage. This suggests that an extensive branch network is still required to compete on any significant scale in this market.”
Why is there a problem of customers switching?
The CMA has been looking at customer inertia on switching, despite their complaints about poor service. Difficulty in comparing accounts may be one barrier to switching and fears that direct debits could get lost during a switch is also a concern. The banks set up a seven-day current account switching service after the Vickers report, but since its launch in September 2013, just 2 million customers have used it.
Why is hard to compare accounts?
Submissions to the CMA from the banks show that there has been a discussion about the impact of free banking; ie no charges for customers who remain in credit. This is because the free service to customers in credit comes from a cross-subsidy by other revenue streams such as overdraft charges. RBS, for instance, told the CMA “that if there was no free-if-in-credit banking accounts, it would be easier for people to enter the market, perhaps with more varied offers”.
So what will the CMA do?
The watchdog has the power to break up the banks, although few in the industry believe this will happen. The regulator could signal the end of free banking by demanding that charges are imposed. It could require action to make it easier to move overdrafts.
The banks have presented solutions. For instance, Lloyds, which has a 25% market share of current accounts, has argued that an even better switching service could be created to allow customers to compare current accounts based on their personal data. TSB – spun out of Lloyds and now owned by the Spanish bank Sabadell – has argued that banks should be forced to set out how much customers have paid each month in an effort to bolster transparency. The challenger banks have asked for help with capital requirements associated with lending to small businesses.
