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A switch in time: The evolution of Britain’s personal current account market

This report examines the evolution of the personal current account market in the UK and looks at whether banking competition has improved since 2000.

There are around 70 million active personal current accounts (PCAs) in the UK. There are long-standing concerns that there is insufficient competition among banks in providing these accounts. The Competition and Markets Authority (CMA), investigating these issues since November 2014, recently concluded that banks do not feel enough pressure to compete on price or quality.

Nevertheless the current account market has changed significantly since 2000. In this report, we take six measures of improved competition and track how they have changed. We show clear positive developments in terms of the following:

  • Product innovation and differentiation: while there is a lot of attention paid to ‘Free If In Credit’ accounts, their share has been declining, by at least 13 percentage points since 2006; and alternative reward accounts now constitute more than a third of new openings.
  • Improved value for money: from our calculations based on successive regulatory inquiry reports, revenue from the average active personal current account has fallen by 17% over the past eight years.
  • Lower market concentration: after the spike in concentration due to the effects of the financial crisis, there has since been a decline.
  • More new entrants and new entrants gaining scale: the mid-sized competitors – Santander and Nationwide – have grown their market share since 2006; and there are many new entrants, ranging from branch-based retail banks to online-only entrants.

The areas identified as showing mixed progress are:

  • Better customer service: despite service innovation through the use of technology and changes in branches, the CMA finds that a substantial proportion of customers are paying above-average prices for below-average service quality.
  • Higher levels of searching and switching: while 75% of consumers are aware of the Current Account Switching Service (CASS) and 64% are confident in the service it offers, many remain inert and do not actively search for information about other current accounts or face barriers in assessing it and acting on it.

The CMA’s final report announces remedies that will tackle these issues and we discuss in the report how they may shape the six measures of improved competition in the future. We also identify some broader issues that are likely to shape the impact of the CMA’s remedies. These include:

  • Market share: this may not be the best measure of competition taken on its own but is used by many observers. There is no guarantee that the CMA proposals of themselves will make a significant difference to the market share of the larger banks though it is likely that they will improve competition on the other measures discussed in this paper.
  • Targeting: more information, available through Open Banking, should facilitate better targeting of product innovation and differentiation to customers. Improving awareness of and confidence in CASS may also need to be targeted through working with specific groups of customers, such as overdraft users, the young and financially disadvantaged.

Low interest rate environment: this may continue to drive consumer demand for reward accounts that pay higher rates of interest, while advantaging those banks that can afford to compete in that way.

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