Are we asking the wrong questions? What works to boost retail banking competition

“The Treasury Select Committee has a reputation for being one of the fiercest in parliament…what’s surprising is that the committee hasn’t taken on board changes in the retail banking market and new research since the last time they looked at these issues.”

The Treasury Select Committee has a reputation for being one of the fiercest in parliament, chaired by arch-sceptic Andrew Tyrie MP. Boosting competition in the retail banking sector is one of the committee’s long-standing goals – and something they’ve spent plenty of time discussing over the past two decades. So in some ways, it wasn’t a surprise when the committee spent their session yesterday ripping into Alasdair Smith, the leader of the Competition and Markets Authority’s (CMA) review of the retail banking sector, following the publication of the investigation’s provisional findings on October 22. What was surprising is that the committee hasn’t taken on board changes in the market and new research since the last time they looked at these issues.

The personal current account market has changed substantially over the past few years. Banks are increasingly offering very attractive current accounts – interest rates well above those available on standard savings products, and dramatically higher than the Bank of England base rate, cashback on purchases and special offers on other products, not to mention the cash incentives for switching now offered on nearly one in five current accounts. Our own research suggests that with these accounts banks are chasing a select group of savvy, affluent customers who are willing to play the market – for these consumers, there’s no question that the current account market is competitive and that they’re getting a good deal.

However, Treasury Committee members are right to point out that this isn’t the case for everyone, and some consumers – particularly those who rely on overdraft borrowing – may still be paying above the odds. So what’s the way to improve outcomes for them? The committee seems to think that ending free if in credit banking would make a difference; and they are unhappy that the CMA has ruled that out. But, according to PwC research, most consumers already know that they pay for their current account in other ways – and prefer this to a single fee. In any case, many current accounts do now have a monthly fee – including new products from Santander, Barclays and Lloyd’s –so it seems that the market providing different consumers with what they want, whether that’s a current account paid for via a fee or in other ways.

The committee also took the CMA team to task for not forcing banks to put a pound figure on the cost of providing current account services. But the arguments the CMA have accepted from banks on this figure are pretty reasonable: the amount it costs a bank to serve a current account customer varies depending on how the account is used – whether the customer uses branches, if they dip into their overdraft, the size of their balance – and averages are likely to be misleading. We might not want to force people to confront the costs of their reliance on branches, for example, if we think that would disadvantage more vulnerable groups.

What is more, we already know that providing customers with a statement of how much their current account has cost them isn’t an effective way of encouraging them to switch, thanks to rigorous Financial Conduct Authority (FCA) research. More timely prompts on cost, like the text messages the CMA have suggested using in their provisional report for overdraft and other charges, have been found to be much more effective. And because the cost of banking is both difficult to calculate and compare, it’s unlikely that giving consumers that number alone will do much to empower them. The CMA’s focus on providing customers with the tools to compare how different accounts would work for them is likely to be much more persuasive.  And, thanks to technology, that’s something we’re increasingly able to do.

The Social Market Foundation’s recent report, Playing the Field, argued for all consumers to be given access to their own banking data, so they can get accurate offers from other account providers and make proper use of the price comparison sites which have helped boost competition in other regulated sectors like energy and insurance. Letters from our banks would tell us how much we’re paying for our banking – but not how much less we could be paying elsewhere. Interactive tools and prompts to use data to compare offers are much more likely to generate greater switching. The Government has already recognised the value of this idea and set up the midata initiative to make it happen – what’s needed now is an expansion and acceleration of the programme to ensure everyone can benefit.

It’s a shame that the Treasury Committee members – who have otherwise done an excellent job in recent years at holding both the banking industry and the Treasury to account – are a bit behind the times when it comes to understanding what works to encourage consumer switching and what doesn’t. So called free banking and average cost per account numbers are no longer the issues, thanks to technology which is changing the way consumers navigate this market. It’s time MPs looked more closely at recent evidence on what does work to boost competition in banking – then they might find their initial judgement of the CMA has been misplaced.


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