After a two-year investigation, the Competition and Markets Authority (CMA) has published provisional recommendations to improve retail banking in the UK. It’s a sector that requires remedial attention, but once again a golden opportunity to radically transform the existing market has been shunned in favour of a less far-reaching set of target outcomes. It mirrors the same timid way the Independent Commission on Banking (ICB) balked at proposing wide-ranging structural and non-structural reforms to the wider banking sector back in 2011. But could we really have expected more? On balance, and with the recent history of government-mandated bank surgery as a guide, ‘no probably not’ is the inevitable – and disappointing – answer.
The CMA suggests that banks should set a monthly maximum charge for unarranged overdrafts on current accounts, and send an alert to customers prior to them slipping into the red so they can avoid being penalised. Not a terrible idea, but not a terrific one either.
The latest figures from the BBA suggest that total overdraft lending stands at £6.9bn (as of March 2016). The FCA previously estimated that 90 per cent of this debt is authorised, and so we’re looking at an unauthorised amount of circa £690m per month. That’s big business, as the penalty fees generated by unauthorised use is a significant income stream for the UK’s banks, and so imposing a maximum limit will simultaneously impact upon revenue.
However, let’s not play a sympathetic violin solo for the banking industry (or customers for that matter). Instead, let’s concentrate on achieving beneficial outcomes beyond the CMA’s recommendations. For instance, increased digitalisation can undoubtedly have a positive impact. Greater use of personal financial management (PFM) tools can help customers better manage their finances, and ideally avoid going overdrawn in the first place by monitoring incomings, outgoings and understanding what’s ‘safe to spend’.
Returning to the provisional report, the CMA appears content to let account holders seek out bargain products. Alongside their overdraft recommendations comes a drive towards the implementation of new online comparison tools, improvements to the account switching service, and the requirement for banks to regularly engage with customers to ensure they are getting value for money. These moves are pragmatic but uninspiring. They will also do next to nothing to loosen the grip that the UK’s biggest banks have on the market. Stimulating competition looks just as hard a task as ever.
Let’s pause for a moment to consider account switching. Introduced in a blaze of consumer-friendly publicity and at an eye-wateringly high cost to the industry – circa £500m was spent in preparation – the service has recorded disappointing levels of activity since it was launched in 2013. Of the approximately 65m personal current accounts held in the UK, 2,819,445 have been switched. To put it another way, that’s 4.3 per cent of the total, or £177 per switch. In the value for money stakes, this doesn’t look like a sure-fire winner.
The ICB surely didn’t envisage such an embarrassingly meagre adoption rate when they made the strategic recommendation to introduce switching, and with the CMA missing this opportunity to be bold, it’s hard to see how this glacial pace of development is ever going to accelerate. Customers are aware of account switching, but they’re just not sufficiently enamoured with the arguments for change. A clear case of better the devil you know, and persuading account holders that the grass might grow sufficiently greener on the other side to justify switching remains a big hurdle to overcome.
Viewing developments through a technological lens, the CMA wants to see the swift introduction of an open API banking standard to help with account comparison and switching for personal and SME customers. This will enable account holders to “safely and securely share their transaction history with other banks and trusted third parties”. It’s pleasing to see that opening-up previously ‘closed’ banking systems is being recommended, but thought must be given to the impact for banks. In practice, it will require banks to ensure data can be accessed easily, necessitating a thorough tidying-up of the data warehouse shelves. It will also demand the provision of requisite layers of security to protect sensitive systems from the unwanted attention of cyber-criminals who relentlessly seek to exploit vulnerabilities in defences.
The proof of the pudding is always in the eating. The CMA’s recipe looks bland. The final report will be published by August 12 2016. There’s still time to add a touch of spice between now and then.