November 7, 2014 by Paul Goldsmith
Retail banking may be about to undergo an overhaul after the Competition and Markets Authority (CMA) announced an in-depth market investigation into the practices in the personal current account and SME (Small and Medium sized enterprises) retail banking sectors. After a consultation was announced in July, the CMA found that most respondents agreed that a market investigation was necessary. In particular, the CMA found concerns about the effectiveness of competition in those sectors. Given that all of us need a current account, this investigation should be closely watched – as the outcome could affect millions of us.
The CMA’s job is to protect the consumer’s interests, which means to make sure consumers have sufficient choice and quality of goods and services available to them at fair prices. This is not about bashing companies, particularly those who are innovating and investing to make all our lives better – but some of what the CMA does is predicated on a belief that competition between firms improves choice, quality and prices.
The investigation so far has found that there are low levels of customers shopping around and switching – which could be due to apathy but also due to the difficulty of finding information and the slowness of the procedure of switching accounts. It could also be simply because current account conditions are so similar that consumers don’t think it is worth even looking at changing.
This is particularly so due to the difficulties customers may be having in making comparisons between banks – and the CMA is particularly worried about the transparency of the overdraft charges on personal current accounts (when you go beneath £0).
The CMA also feel that it is very hard for smaller and newer providers to develop their businesses because of the continuing barriers to entry and barriers to expansion into the sector. The threat of new entry (contestability) is seen as a strong motivator for incumbent firms to improve what they are offering to customers.
Finally – the CMA is seeing very little movement over time in the market shares of the four largest banks (called the ‘Big 4’ – HSBC, Lloyds, Barclays, RBS) – which are providing over three-quarters of personal and business current accounts (so there is a 4-form concentration ratio of 75%).
What happens after the investigation is that the Market Reference Group – who are carrying it out – will decide what action, if any, may be needed to improve competition. One of the areas that it is looking at, for instance, is the ‘bundling’ of products with a current account, which means that some very good mortgage deals are only available if you have a current account with the bank. That could be seen as injurious to competition. If so, the practice might be banned.
It’s worth remembering though, that the CMA are essentially a ‘light touch’ organisation, with any intervention in what is a free market (although some argue that banking is a ‘utility’ and that there is a case for it to be nationalised) having to be proven necessary. So if something does happen, the burden of proof would be quite high.
Overall though, the investigation should be welcomed. I am fed up of the 0.1% interest I get on my current account, and that every other competitor has the same rate. I am also fed up of finding that they are advertising great deals with ‘only available to current account holders’ in the small print. On the other hand, banks need profit in order to invest in the services they provide to us. So it is a fine balance.