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Is Britain’s banking system competitive enough?

The current account market is inherently more static than the energy, telecommunications and insurance markets

By Emran Mian  

A view of Canary Wharf in London. ©Jonathan Brady/PA Wire/Press Association Images

This article was produced in association with Bacs

Read a companion piece, “Financial inclusion, switching and banks,” here

There are around 70 million active personal current accounts in the UK. It’s not only one of the largest consumer markets, it provides services that are fundamental to how we live and work: most of us get paid through our current accounts and they’re what we use to pay bills or send money to family members. Alongside the mobile phone, it’s the product that the majority of us interact with the most.

As such, it’s no surprise there are long-standing concerns about whether there is sufficient competition among banks in providing these accounts.

The latest inquiry, run by the Competition and Markets Authority (CMA) recently concluded that banks do not feel enough pressure to compete on price or quality. The CMA, which regulates competition across UK markets, found, for example, that a substantial proportion of customers are paying above-average prices for below-average service quality.

Nevertheless, the current account market has changed significantly in recent years; and looking at these changes more closely might give us a better sense of what the benefits of competition can be. What’s more it can help us establish whether consumers receive them and, if not, then what needs to change.

A number of measures of competition show how the market has advanced in recent years. An increase in product innovation, with providers developing new features to keep or win customers, suggests that competition is working. Similarly, whilst “free if in credit” (FIIC) accounts remain dominant, the market share of this type of account has dropped by at least 13 percentage points since 2006 and it looks set to drop further. A third of new accounts opened are “reward” accounts, offering a premium rate of interest or cashback on purchases. As such, the incentives for customers to shop around are now much clearer.

The switch to reward accounts has been accompanied by another sign of improved competition: new entrants. Starting with Metro Bank in 2010—the first new high street bank to get a licence in 150 years—a range of new providers have come into the market, from those with a traditional branch banking offer to those who are online-only. There are another 20 providers going through the regulatory process to come in behind them. Whether these “challenger” banks will be successful in the long run is still to be seen but they have already brought increased choice to customers.

For some critics though, these positive changes are peripheral. They point, for example, to the relatively low numbers of people who are switching their current account and use this as evidence that the market remains uncompetitive. The problem is that switching rates may not be the best indicator. The personal current account market doesn’t have the same prompts to switch as other markets—such as an annual renewal—and few premiums to pay given the FIIC model. The current account market is therefore inherently more static than energy, telecommunications and insurance; “promiscuous” switchers are less common. Ultimately, consumers do not operate like economists—examining each product forensically and securing the best deal. Some of the stickiness in the market also derives from higher satisfaction rates than other sectors, with 91 per cent of customers satisfied with their present provider.

Nevertheless, the prospect of customers switching, together with the entry of new players, has improved value for money for all customers, not only switchers. We can directly measure the value for money that customers are getting by looking at the change in the revenue banks receive per active account: it’s fallen by 17 per cent in real terms since 2006. This is a result of banks having to offer higher rewards to keep or win customers plus lower charges. While the new entrants have yet to grow to scale, mid-sized providers like Santander have grown their market share; and awareness and confidence in the Current Account Switch Service—launched in 2013 to facilitate switching between providers—is rising, with 76 per cent of customers now aware of the service and 66 per cent confident in using it.

So why does angst about the market persist? The Labour Party fought the last election with a pledge to investigate whether the big banking groups should be broken up. When Prime Minister Theresa May launched her bid for the leadership of the Conservative party she also wondered aloud whether the big players might be abusing their position. Certainly their share of the market remains around 70 per cent. Even the latest proposals from the CMA—for example, to create common metrics of service quality, make it easier for customers to compare products and put pressure on overdraft charges—are not directly targeted to change that figure. Is it important? If product innovation is taking place, new providers are coming into the market and value for money is increasing then perhaps it doesn’t matter.

Equally, the focus on switching volumes provides a limited perspective on the impact of competition. The combined effect of the CMA proposals, new providers with new product offers, and the development of digital tools that help consumers manage their money, will all play a potentially larger role in shifting the market in the future. The real test over the coming years will therefore be whether younger people, the financially excluded and overdraft users—all picked out by the CMA as the target groups who need to see improved value—feel the benefits of improved competition.

Ultimately, looking more closely at whether these consumers are getting a better deal over the next few years, and increased consideration of the various options available to them, might be more important than overall awareness about switching or small changes in switching rates.


To read the SMF’s full report examining the evolution of the personal current account market in the UK and whether banking competition has improved since 2000 click here.

With the support of Bacs, Prospect hosted a series of invite-only roundtable discussions at the 2016 Party Conferences on competition in banking, customer awareness and market participation in order to determine what more can be done to make the current account switching market more competitive. The discussions were chaired by Andy Davis, Finance Editor for Prospect. Speakers included: Rushanara Ali MP, APPG on Inclusive Growth APPG; Helen Goodman MP, Treasury Select Committee; Alan Man MP, Vice-Chair, Financial Markets and Services APPG; Chris Dunne, ‎Payment Services Director, Vocalink; Dr Paul Anthony Jones, Director, Research Unit for Financial Inclusion (RUFI), Liverpool John Moore’s University; Anne Pieckielon, Director of Product and Strategy, Bacs; Chris Pond, Commissioner, Financial Inclusion Commission; and Martin McTague, Policy Director, Federation of Small Businesses.

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