Financial inclusion, switching and banks

Financial health is undervalued

September 20, 2016
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Read a companion piece titled "Is Britain's banking system competitive enough?" here

Two million adults in the UK don’t have a bank account. I think that’s staggering.

Of the adults that do have bank accounts, a third have been with their bank for over twenty years. Only one in fifty people switch their main account provider each year. That’s why competition to sign up young customers for their first current account is so fierce. Once you open an account with a bank, chances are you’ll be with them for years—an accidentally loyally customer.

So how do we shape policy to cut financial exclusion and enable customers to get the most out of their banks?

Financial exclusion is a huge, largely invisible problem. In my Durham constituency there is a town of 12,000 people with no bank branch, because low incomes mean their custom is not profitable. The financially excluded pay a “poverty premium” of £1,300 a year because they are forced to meet their financial needs through other methods. For instance, two million people took out a high cost loan in 2012 because they couldn’t access other credit.

One justification for closing branches is that the public are shifting online. Just after the Referendum, Lloyds announced another 200 closures. However, there is huge overlap between the digitally excluded and the financially excluded. The Tinder Foundation found that 11 million people lack the basic online skills they need to do things like online banking, and that’s ignoring the fact that many areas lack reliable broadband infrastructure in the first place.

Another problem concerns switching and competition. Knowing the price of a service and being able to switch provider are essential for any market to be competitive.

Most people stay with their bank, happy or not, because frankly no one wants to spend hours porting across direct debits and bills and changing their details. People are also worried about what would happen if anything went wrong. In fact, the Current Account Switch Service (CASS) covers 99 per cent of the current account market and allows individuals and small businesses to switch banks easily. Your new bank will manage the whole process for you free of charge.

Not enough people know this scheme exists, and of those that do, they aren’t clear how it works and how reliable it is. It is the job of industry, regulators and consumer champions to raise awareness of CASS so consumers take advantage of switching and in turn force banks to be more competitive.

How much does a current account cost? Most people think it’s free. There’s no charge for opening it and no obvious upfront cost to banking. So why would one bother to switch from one free account to another? Actually, once you take account of fees and charges, a bank account is a paid service like any other. But because these charges are opaque and oblique, most of people don’t work out what they’re really paying and where they might be better off.

I think we need much more transparency. For a start, it can be nearly impossible to work out how much you are paying for your account. TSB suggests that banks should include how much customers have paid each month for their banking as a monthly bill, perhaps on their statements. I think that’s an excellent idea. I also agree with them that banks need to be much clearer in setting out account costs and charges in ways that are easily comparable across the sector so people can compare apples with apples.

Once customers are aware of what they’re paying, there’s a greater chance of them choosing to switch.

Alongside TSB’s proposal, I have a few potential solutions to these problems that I’d like to explore. Firstly, I think banks should be obliged to offer a free basic current account with minimal conditions so that no one is left without this vital modern service.

Ironically, to tackle financial exclusion, I think we need to suspend competition law when it comes to branch closures. Consumers can’t switch banks and find deals if there is only one (or zero!) accessible local branch. Small rural villages and other areas might not see high volumes of traffic visiting branches, so it doesn’t make business sense for three high street banks all to keep a branch open. But there is clearly the need for at least one for the many people who don’t or can’t bank online. At the moment, competition law prevents banks from working between themselves to establish the local need and to run a joint venture where everyone can bank out of one shared branch.

Thirdly, I am sympathetic to the idea of harnessing the Post Office and its branch structure to create a People’s Bank to help plug the gaps in the network. The precise design is something that would need considerable thought and would need to engage with the ideas of transparent rates, easy switching and offerings for the financially excluded.

Financial health is undervalued. I think we need a much more proactive approach in helping consumers.


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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