RegulationAug 9 2016

Watchdog demands banks make it easier to switch

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Watchdog demands banks make it easier to switch

Older and larger banks do not have to compete hard enough for customers’ business, while smaller and newer banks find it difficult to grow, according to the Competition and Markets Authority.

The final report of its retail banking market investigation has concluded this means many people are paying more than they should for banking services and are not benefiting from new services.

To tackle these problems, the Competition and Markets Authority is implementing a wide-reaching package of reforms, focused on ensuring customers benefit from technological advances and new entrants and smaller providers are able to compete more fairly.

Key measures:

Requiring banks to implement Open Banking by early 2018 to accelerate technological change in the sector. This will enable personal customers and small businesses to share their data securely with other banks and with third parties, enabling them to manage their accounts with multiple providers through a single digital ‘app’, to take more control of their funds (for example to avoid overdraft charges and manage cashflow) and to compare products on their own requirements.

Requiring banks to publish trustworthy and objective information on quality of service on their websites and in branches, so customers can see how their bank shapes up. Whether a personal customer or small business is willing to recommend their bank to friends, family and colleagues will be a core measure.

Requiring banks to send out suitable periodic and event-based ‘prompts’ such as on the closure of a local branch or an increase in charges, to remind their customers to review whether they are getting the best value and switch banks if not.

Underpinning these remedies, the Competition and Markets Authority is introducing further measures to make it easier for customers to search and switch.

It pointed out that only 3 per cent of personal customers switch to a different bank in any year, despite personal customers being able to save £92 on average per year by switching provider.

The CMA has also introduced specific measures to benefit unarranged overdraft users, who make up around 25 per cent of all personal current account customers and small businesses.

Banks make £1.2bn a year from unarranged overdraft charges, so will now be required to send alerts to customers going into unarranged overdraft and inform them of a grace period, to avoid charges.

Banks will also have to set a monthly cap on unarranged charges and tell their customers about it.

Alasdair Smith, chair of the retail banking investigation of the Competition and Markets Authority, said the reforms should shake up retail banking for years to come.

“We are breaking down the barriers which have made it too easy for established banks to hold on to their customers,” he stated.

“Our central reform is the Open Banking programme to harness the technological changes which we have seen transform other markets.”

Kevin Mountford, head of banking at MoneySuperMarket, said those looking for wholesale reform of the banking market are likely to be holding their heads in their hands this morning.

“The CMA’s final remedies are more ‘gently does it’, as opposed to the seminal, watershed moment for British banking that many had been looking for,” he said.

“The CMA’s focus on the open API banking standard is a source for optimism,” he continued, noting that these software protocols are already being used to great effect in other industries. “Given the tight timelines, we need clarity on how these changes will be mandated, governed and measured so that consumers and SMEs reap the benefits.”

Sophie Guibaud, vice president of European expansion at Fidor Bank, said: “Consumers have been suffering for far too long from complicated current account prices.

“It’s now time for the banks to make their prices clearer for everyone, whilst putting in place measures to help customers choose the best current account and service for them.”

“In the future, we believe that more people will end up switching their banking services to different providers when they see clear differences in the offers available to them.

“With new banks coming to the market with more innovative and targeted offerings, the percentage of people switching services in the future will certainly increase.”

peter.walker@ft.com