CMA – Digital Finance Analytics (DFA) Blog

CMA Remedies Could Mean Slow Profit Erosion at UK Banks

Remedies listed in the Competition & Markets Authority’s (CMA) final report on the UK’s retail banking market could lead to a slow but steady erosion of profitability at the major UK banks, says Fitch Ratings. But the initiative depends on customers being comfortable sharing sensitive financial information with other banks and third parties, which could represent a major barrier.

The remedies hinge on using technology to ensure that customers get the best deal, implying a loss of revenue for the banks. For example, several of the CMA’s remedies are directed at making sure customers can either reduce or avoid overdraft charges, which the CMA says bring in one-third of total revenue generated by retail banking activities in the UK.

UK current account holders are already able to ‘switch’ their account between banks in seven days by using the Current Account Switch Service (CASS), in place since September 2013. CASS was set up by the UK government to improve competition, but switching rates remain relatively low. In 2015, only around one million customers, equivalent to 3% of current account holders, used CASS.

Banking ‘shake-up’ relies too much on customers shopping around

From The Conversation.

A report that was billed to transform the UK’s retail banking industry has been criticised for not doing enough to protect customers. The Competition and Markets Authority report was two years in the making and is geared towards improving competition and the products on offer for individuals and small businesses.

But the government watchdog puts the onus on bank customers to improve market conditions. It said their lack of engagement with the market “weakens banks’ incentives to compete” and contributes to the costs involved for challenger banks to gain a foothold in the market. Therefore its package of remedies focuses heavily on measures aimed at stimulating consumers to shop around and making it easier for them to switch. Even with the new technology it proposes, this will be easier said than done.

Central to the reforms is a requirement that banks make their computer systems accessible to trusted third parties so that, with customers’ consent, their banking data can be transferred and used to drive new online services and mobile apps that compare the best banking deals and recommend switching when cost savings are identified. The aim is to have this part of the remedy up and running by 2018.

There are some obvious concerns: the security of data passed to third parties, the possible cost of these new services, and the fact that older generations and rural communities in particular often have no or poor internet and mobile access, so are not necessarily in a position to benefit. A further barrier may be that consumers are simply overloaded with calls to shop around.

Unrealistic expectations

A common cry from regulators of everything from gas and electricity to broadband and insurance is that consumers must engage more actively to make markets work. From all sides, you are urged to shop around and switch regularly to persuade providers to improve quality and cut prices.

But research I’ve conducted suggests how unrealistic it is to expect households to shop around for every service they use. I looked at the shopping and switching habits of more than 1,000 consumers for 12 common household and financial services, including energy, communications, banking, savings and credit cards. Most used ten or 11 of these services, but at best had shopped around for fewer than half (the blue line in the chart below).

Only a tiny proportion of households shopped around for every service they use (the green line in the chart). Households that shopped around prioritised their car, buildings and house insurance, followed by their gas and electricity provider. They were least likely to shop around for their bank account.

Average number of services for which households had shopped around in the last three years as a percentage of services used by the household and percentage shopping for all the services used. Jonquil Lowe, CC BY-ND

Across all services, the research found that households who had not shopped around tended to overestimate the time and difficulty of the task. But even among households who did shop around for a bank account, one in five found the process took more than a day and nearly one in ten found the process difficult. So part of the challenge facing regulators is to improve, and instil greater confidence in, the industry’s current account switching service (CASS) – something the CMA and the industry is trying to do.

Making life easier

My research showed that, for all types of household and financial services, most of those that did not shop around tended to think that all providers offer similar deals and that shopping around would save too little to make the chore worthwhile. The new third-party services that are being proposed may help to make banking differences more visible. In addition, the CMA will require banks to gather, publish and share data on the quality of their services, including whether existing customers would recommend their bank to friends, family and colleagues.

Another finding of my research was that households were most likely to shop around for insurance products. An important feature of these products is that they are annual contracts so there is an automatic, regular prompt to shop around. The CMA measures will try to mimic this for bank accounts by requiring banks to send existing customers prompts, suggesting that they shop around for a new account. These may be on a regular basis and also triggered by events, such as your local bank branch closing down.

While the CMA measures aim to tackle the particular shortcomings of bank customers that it has identified, they nonetheless overlook the wider context of households potentially being overburdened by multiple calls to become active and engaged consumers. My research suggests that, as the number of services you use increases, there may be resistance to taking on yet more shopping around.

Attempts by the government to get people to add bank accounts to this list may be an especially tough challenge and there may be a danger that shopping for bank accounts reduces the time and effort you are able to devote to shopping for other services. Regulators need to wake up to the fact that consumers simply may not be willing to take up the workload of driving the demand side of competition across multiple markets for household and financial services.

Author: Jonquil Lowe, Lecturer in Personal Finance, The Open University

CMA paves the way for Open Banking revolution

The final report of the UK Competition and Markets Authority’s (CMA) retail banking market investigation, published today, concludes that older and larger banks do not have to compete hard enough for customers’ business, and smaller and newer banks find it difficult to grow. This means that many people are paying more than they should and are not benefiting from new services.

To tackle these problems, the CMA is implementing a wide-reaching package of reforms. Central to the CMA’s remedies are measures to ensure that customers benefit from technological advances and that new entrants and smaller providers are able to compete more fairly. The key measures, which will benefit personal and small business customers, include:

Requiring banks to implement Open Banking by early 2018, to accelerate technological change in the UK retail banking sector. Open Banking will enable personal customers and small businesses to share their data securely with other banks and with third parties, enabling them to manage their accounts with multiple providers through a single digital ‘app’, to take more control of their funds (for example to avoid overdraft charges and manage cashflow) and to compare products on the basis of their own requirements.

Requiring banks to publish trustworthy and objective information on quality of service on their websites and in branches, so that customers can see how their own bank shapes up. Whether a personal customer or small business is willing to recommend their bank to friends, family and colleagues will be a core measure but we will also be requiring banks to publish and make available through Open Banking a range of other quality measures.

Requiring banks to send out suitable periodic and event-based ‘prompts’ such as on the closure of a local branch or an increase in charges, to remind their customers to review whether they are getting the best value and switch banks if not. Unlike many other financial products such as home insurance, current accounts do not have annual renewal dates to act as natural reminders and other possible triggers like business growth are not prompting customers to review what they are getting from their bank.

Underpinning these remedies, the CMA is introducing further measures to make it easier for customers to search and switch. At the moment only 3% of personal and 4% of business customers switch to a different bank in any year. This is despite, for example, personal customers in Great Britain being able to save £92 on average per year by switching provider, with savings of around £80 a year on average available for small businesses. Larger savings are available for overdraft users – for example, personal customers who are overdrawn for one or two weeks every month could save £180 per year on average.

The CMA has also introduced specific measures to benefit unarranged overdraft users, who make up around 25% of all personal current account customers, and small businesses.

Banks make £1.2 billion a year from unarranged overdraft charges. Banks will be required to send alerts to customers going into unarranged overdraft, and inform them of a grace period, to avoid charges – research by the FCA has shown that this type of alert, when combined with mobile banking, can heavily reduce overdraft charges. Banks will also have to set a monthly cap on unarranged charges, and tell their customers about it.

The CMA found that small businesses lack tools providing comprehensive information about bank charges, service quality and credit availability. The CMA is throwing its weight behind the independent charity Nesta in a new initiative to put this right, requiring banks to provide Nesta with financial backing and technical support, alongside introducing a range of other measures targeted at small businesses such as a loan eligibility tool.

Alasdair Smith, Chair of the retail banking investigation, said:

The reforms we have announced today will shake up retail banking for years to come, and ensure that both personal customers and small businesses get a better deal from their banks.

We are breaking down the barriers which have made it too easy for established banks to hold on to their customers. Our reforms will increase innovation and competition in a sector whose performance is crucial for the UK economy.

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.

This is backed up by a wide package of measures to improve the current account switching service, to make it easier for small businesses to shop around and open new accounts or get a loan, and to see how the quality of service provided by your bank compares with other providers.

We are also taking measures to give customers much greater control over their overdraft charges, so that they are clearly told when they are about to be incurred and have an opportunity to avoid them. Alongside this, banks will have to cap their monthly charges for unarranged overdrafts.

The CMA will now focus on putting in place the remedies announced today, working with others whose role it is to make individual remedies happen, such as HM Treasury, FCA, Bacs and Nesta

UK Regulator Seeks To Lift Banking Competition

The UK’s Competition and Markets Authority (CMA) has outlined a wide-ranging package of proposals to tackle the issues hindering competition in personal current accounts (PCA) and in banking services for small and medium-sized enterprises (SMEs). It includes new protections for overdraft users. They expect the package of remedies, taken together with ongoing technological developments, to result in significant changes to the operation and structure of retail banking markets in the UK.

At present, it is hard for bank customers to work out if they are getting good value. Bank charges are complicated and opaque and many customers think it is difficult and risky to change banks.

As a result, nearly 60% of personal customers have stayed with the same bank for over 10 years and over 90% of SMEs get their business loans from the bank where they have their current account.

This means that competitive pressures are weak, so banks do not need to work hard enough on price or quality of service.

The CMA considered whether the largest banks should be broken up but it came to the view that this would not address the fundamental competition problems. Having more and smaller banks, which customers still couldn’t easily choose between because of lack of transparency on fees and charges, would not significantly improve the market or give customers a better deal.

The CMA also considered whether to get rid of ‘free if in credit’ (FIIC) current accounts. Even though FIIC accounts are not really ‘free’, they do work well for many customers, and banning particular products would simply take away choice and risk the overall cost of accounts rising, not falling.

To transform the market the CMA believes banks instead need to be made to provide their customers with the right information so that they can easily find out which provider and type of account offers best value for them. The CMA also proposes to push the development of new online comparison tools and improve the current account switch service (CASS) to make switching banks more straightforward and give customers more awareness of, and confidence in, the process.

FIIC accounts are certainly not free for overdraft users, who represent nearly half of personal customers. The CMA’s proposals include new measures targeted at overdrafts, with a particular focus on users of unarranged overdrafts; in 2014, £1.2 billion of banks’ revenues came from unarranged overdraft charges.

The CMA proposes requiring banks to set a monthly maximum charge for unarranged overdrafts on personal current accounts. Customers may not even be aware of when they go into unarranged overdraft or realise the costs they are incurring, so the CMA also wants banks to alert people when they are going into unarranged overdraft, and give them time to avoid the charges.

Big technological changes are happening in banking, and the CMA wants to harness them to empower customers to compare and switch accounts. The CMA is proposing to require banks to move swiftly to introduce an Open API (application programming interface) banking standard. This standard will enable personal and SME customers to safely and securely share their unique transaction history with other banks and trusted third parties. This will enable bank customers to click on an app, for instance, and get comparisons tailored to their individual circumstances, directing them to the bank account which offers them the best deal.

The CMA also proposes that banks should be made to regularly prompt their customers to check that they are getting good value from their banking provider. When these prompts direct customers to digital comparison services which give tailored price-comparison and service quality advice, the foundation has been laid for a major change in the retail banking sector.

On these foundations, the CMA proposes to build a strong package of measures to deliver better banking services to SMEs. Making it easier for SMEs to shop around and open a new current account will reduce business owners’ reliance on their personal bank when choosing a bank for their business. By making the prices and availability of lending products more transparent, the majority of SMEs need not, as is the case now, turn directly to their existing bank for finance without considering other offers.

The package of changes could bring benefits to bank customers to the tune of £1 billion over 5 years.

Already, if personal customers switched to a cheaper product for them, annual savings could be on average £116; ranging from £89 on average for customers who do not use an overdraft, to £153 on average for overdraft users.

Alasdair Smith, Chair of the Retail Banking Investigation, said:

For too long, banks have been able to sit back and not work hard enough for their personal and small business customers. We believe the strong and innovative package of measures we are proposing will give customers the information and tools they really need to get a better deal out of the banks. They will also protect those who fall into overdraft from being stung with unexpected fees.

New entrants into a market are an important source of competition and innovation, and we are well aware of the current barriers to challenger banks in UK retail banking. What’s really holding them back is their ability to highlight to customers how new offerings compare with their current deal. Our package of banking reforms will help new competitors get a stronger foothold in a market which is of vital importance to the whole economy.

The CMA invites submissions in writing by 7 June. They will publish the final report in early August.