On 22 October 2015, the Competition and Markets Authority (“CMA”) published a summary of its provisional findings report and a notice of possible remedies in relation to its investigation into the personal current account (“PCA”) and the small and medium enterprise (“SME”) banking sectors. The full provisional findings report was published on 28 October 2015 (see here). In its report, the CMA identified competition concerns in both sectors.
The CMA found that there have been a number of positive developments in the PCA market sector, including increasing initiatives in product development (i.e., the introduction of reward accounts and of one-off switching incentives). The proliferation of digital and internet banking has also had a positive impact on the PCA market. Despite these positive developments, low searching and switching rates suggest that customers are nonetheless not responding to differing prices and quality. Low customer engagement in turn means that banks are not incentivised to compete on price and quality, or to innovate.
The CMA has linked these competition concerns to a number of factors, comprising :
- A lack of natural trigger points such as a contract end date. This means that customers are not required to periodically review their existing PCAs to assess whether they hold the best product for their requirements.
- A high level of customer satisfaction amongst PCA-holders with their existing accounts, despite the differing prices and quality of service provided by different banks. The low level of searching also indicates that customers are not always actively deciding to stay with their current provider and may, in addition, not be aware that other PCAs may serve them better.
- A perception that PCAs are low-cost products and most PCA holders are unaware of the financial benefits that switching their account could bring.
- No straightforward way for customers to access information on PCA charges and service quality, and to obtain a detailed knowledge of their own account usage. Both are necessary for customers to decide on the best account for them.
- A continued perception by PCA-holders that switching accounts is a ‘hassle’.
The CMA also explicitly identified two groups that are particularly affected by these competition concerns. These include non-engaged customers who tend to be less financially sophisticated, as well as overdraft users due to the lower competitive pressure on overdraft charges.
In the SME market, the CMA found that competition is also not fully effective. Similar to the PCA market, customer engagement is low and barriers exist which prevent SMEs from identifying the best products in the market for their particular requirements and from switching their business current account (“BCA”) to an alternative provider. As a result, there is no pressure on banks to provide innovative products and to compete on price and quality. In addition, weak customer engagement makes it more difficult for new entrants to compete effectively with more established banks.
By looking at the various stages in the life of an SME, the CMA found that customer engagement was particularly weak at the initial stage, where 51% of start-up SMEs go to their PCA-provider to open their BCA, and at the end of the free banking period, where 67% of SMEs do not consider switching. The reasons identified include customer satisfaction, alongside an absence of natural trigger points which would prompt SMEs to review their existing arrangements, the low cost of BCAs vis-à-vis other costs, and the perception that switching brings limited benefits, amongst others.
In terms of SME lending, the CMA cites three reasons why SMEs go to their main bank for lending. These include SMEs perceiving that maintaining a relationship with their existing bank will help them obtain finance, SMEs considering switching to be inconvenient, and the difficulty for SMEs to obtain clear and transparent pricing information across banks.
The CMA has proposed a number of remedies (see here), including:
- Requiring banks to prompt their customers to review their bank accounts at certain trigger points. These trigger points are situations when customers are more likely to consider a change, including for example a dispute between a provider and an individual customer, when overdraft charges are imminent and when a BCA is opened for the first time.
- Increasing the public awareness of the potential savings or rewards that could be achieved by switching accounts through increased advertising. Promoting the benefits of using the Current Account Switch Service to switch accounts in terms of security and convenience.
- Enabling price comparisons between PCA-providers by upgrading Midata and facilitating access to specific transaction data. Midata is a Government-backed programme, rolled out in April 2011, which gives consumers access to historic PCA transaction data. This data can then be used on price comparison sites to find the best product based on individual usage.
- Creating a price comparison website for SMEs.
- Providing customers with a way of comparing the service quality of their account providers.
- Standardising and simplifying the BCA opening procedures.
- Removing obstacles for overdraft users when considering whether to switch accounts, actually switching accounts and during the switching process.
The CMA has also stated that it is not planning to take certain proposed remedies forward, including putting an end to free-if-in-credit accounts or implementing structural remedies such as breaking up banks.
The CMA will now consult and hold detailed discussions with all interested parties on the findings and possible remedies ahead of publishing its final report in May 2016. Interested parties have until 5pm on Friday 20 November 2015 to submit reasons in writing as to why the CMA’s provisional findings should not become final, or should be varied. Comments in relation to the notice of remedies should also be submitted by this deadline.