UK to launch competition investigation into retail banking
Essential parts of the UK retail banking sector lack effective competition and do not meet the needs of personal consumers or SMEs, according to government body the Competition and Markets Authority, which is now planning to launch a full investigation that could last 18 months.
The CMA took the decision to launch an investigation following two studies it carried out into SMEs and current accounts respectively. Those studies highlighted a number of areas of serious concern, which the regulator says merit further investigation. According to the CMA, the findings were as follows:
- Barriers to entry and expansion for newer and smaller banks remain significant and the markets remain concentrated, particularly in Scotland and Northern Ireland.
- There is very little movement in the market share of the largest banks (other than as a result of mergers and acquisitions).
- Many customers see little difference between the largest banks in terms of the services they offer.
- Levels of shopping around and switching between banks remain low. Perhaps as a result, very limited market share gains have been made in recent years by those banks with the highest levels of customer satisfaction – not what would normally be expected in well-functioning competitive markets.
- Limited transparency, and difficulties for customers in making comparisons between banks, particularly for overdraft charges on PCAs which are very complex. This makes it hard for customers to choose the cheapest or most appropriate accounts for them, so limiting banks’ incentives to compete. This may result in higher overdraft charges than would otherwise be the case.
- It is also possible that, particularly for personal current accounts, there is a degree of cross-subsidy, both from other retail banking products and, on the ‘free-if-in-credit’ model, between different customer groups, which may distort competition.
In response, some of the UK’s larger banks have objected to the proposed investigation on the grounds that these issues are best handled by the industry rather than direct regulatory intervention, and put forward their own alternative suggestion. Barclays, HSBC, Lloyds Banking Group and RBS have proposed to set up a comparison website to improve transparency, to establish new account opening standards to make it easier for SMEs switching banks to open accounts, and to take promotional measures to boost comparability and switching.
The CMA is now consulting on the proposed investigation, but has indicated that it is currently inclined to reject these proposals in favour of a full investigation. However, it has also said that it remains open to views on this issue before it takes a final decision.
Unsurprisingly, the prospect of a full competition investigation has been welcomed by smaller challenger banks in the UK, such as Metro Bank, which opened in 2010 and operates in the southeast of England.
“We fully support the CMA’s announcement today and believe an investigation into the personal current account market and SME banking sector is indeed needed to create a level playing field, which in turn will create a competitive banking sector,” said Craig Donadlson, chief executive at Metro Bank. “While work has been done to improve this, we desperately need a level playing field that allows new entrants to come into the sector and win customers. Importantly, these new entrants should offer differentiated banking models that suit different customers’ needs; giving customers a choice is the key.”
The debate over retail banking competition in the UK has produced several initiatives in recent years aimed at bolstering consumer choice and competition. These include changes to the authorisation process for new banks aimed at making it simpler and easier to start a new bank, as well as the introduction of the UK Payments Council’s seven-day account switching service in September 2013. However, not everyone is convinced that these efforts have produced much positive progress.
“Frankly, account switching hasn’t been an earth shattering move to encourage competition in the banking sector,” said Paul Adams, chief executive at Glory Global Solutions. “Under 600,000 people have made the jump which, in the grand scheme of the UK adult banked population, is extremely low.”
The debate over the extent to which the account switching service has or has not helped to increase competition has swung back and forth ever since it was launched. While some commentators point out that overall switching has risen since last year, others have argued that switching is in any case only a peripheral factor when set against issues such as customer service and product features. For Adams, new entrants such as supermarkets are more likely to be a source of effective competition than entrants such as Moven or Holvi that focus on a digital-only approach.
“A lot of challengers tend to enter the market via an online or digital presence for obvious cost reasons,” he said. “But, without branches, how do people know who they are, especially in more suburban areas? The big supermarkets stand more of a chance, based on their huge store networks and established relationships with British consumers.”
The deadline for submissions to the CMA consultation is 17 September.