The Competition and Markets Authority (CMA) watchdog is demanding a shake-up in the current account market following a two-year investigation into the retail banking sector.
It found many current account customers are paying more than they should for their banking and many are sticking with the big banks that do not compete hard enough to offer good deals. It says personal banking customers could save £92 a year on average by switching and those using an overdraft stand to save around £180.
In order to tackle the problems, the CMA has set out a package of reforms focused on using technological advances to encourage switching, which will allow new and smaller providers to compete more fairly.
Online banking revolution
The CMA wants banks and building societies to offer ‘Open Banking’ by early 2018, which must include a digital app that will allow customers to share their data securely with other banks.
This will make it easier to manage accounts from multiple providers, find a new current account tailored to individual usage and help manage cash flow between accounts.
The watchdog also wants banks to publish objective information on the quality of service on their websites and in branches.
Alasdair Smith, chair of the CMA's retail banking investigation, said: “Our central reform is the Open Banking programme to harness the technological changes which we have seen transform other markets.
"We want customers to be able to access new and innovative apps which will tailor services, information and advice to their individual needs."
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Improving switching
The CMA also wants banks to send out ‘prompts’ by early 2017 informing customers of things like the closure of a local branch, an increase in charges and to remind them to review whether they are getting the best deal.
The watchdog says this is necessary as, unlike other financial products like home insurance, current accounts don’t have an annual renewal date to act as a reminder to people to reconsider their deal.
The CMA also wants to make it easier for people to search for new deals and switch.
The Current Account Switch Service (CASS), which allows people to move bank account in seven days has been successful in terms of what it offers, but right now just 3% of personal customers switch to a different provider each year. The CMA wants to increase customer awareness and confidence in the service.
Overdraft charges crackdown
The CMA will also target measures at people who use overdrafts, who make up half of personal current account customers.
Banks will have to send alerts to customers that go into the red and let them know there is a grace period to avoid charges.
Providers will also have to set a maximum monthly charge from 2017 to make it clearer how accounts compare based on these costs. However, the CMA stopped short of imposing a cap on unarranged overdraft fees so it’s up to the banks how much they charge.
The CMA said banks make £1.2 billion a year from unarranged overdraft charges.
Reforms ‘don’t go far enough’
Laith Khalaf, Senior Analyst at investment company Hargreaves Lansdown, said the reforms weren’t radical enough and were closer to an ‘evolution rather than a revolution.’
Challenger banks have also been critical of the reforms. Nick Kennett, Director of Financial Services at Post Office Money, said the CMA has missed an opportunity to address the free-in-credit banking system problem. He commented: “Our current system of free-in-credit banking reinforces the dominance of the UK’s major banks and doesn’t allow for customer-focused challengers to offer true innovation.
“This system produces products that leave many paying unclear, excessive fees which is particularly concerning for vulnerable consumers who have difficulty managing their money – while the introduction of a ‘maximum monthly charge’ on overdrafts seems like a promising way to address this, it is set by each individual provider rather than as an industry-wide standard. It forces consumers to find the best rate rather than simply offering them a fair deal.”
Mike O’Connor, Chief Executive of StepChange Debt Charity, was also critical of the measures set out for overdraft charges. He said: "These recommendations from the CMA will not do enough to get rid of excessive overdraft charges. There should be a cap on unauthorised overdraft charges and it must be set independently by [regulator] the Financial Conduct Authority, not by the banks themselves. The largest banks already cap charges, but these caps vary widely and are still too high. The CMA’s recommendation may do little to change this.”
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