Latest developments

The Competition & Markets Authority (CMA) issued a short update on its retail banking investigation which includes services to SMEs at the end of last year. Since publishing its Issues Statement in November 2014, it has received standard off-the-shelf information from relevant parties in response to its initial information request, as well as comments on the three theories of harm it has identified.

In January and February 2015, the CMA is conducting site visits across the UK, visiting a number of parties to the investigation to find out how they carry on their business and how they differentiate their offers to consumers. During this time, it will be analysing detailed data and information provided to it by the parties and conducting a number of case studies looking at the barriers to entry or expansion that new and expanding players in the retail banking market might face. In terms of the latter, it has chosen to study some of the more recent market players Metro Bank, Tesco Bank, TSB Bank and Virgin Money as well as one building society, Nationwide. The case studies will also look at Atom Bank, which is a web-only offering expected to launch in 2015.

The CMA will be using GfK NOP to carry out surveys of personal current account (PCA) customers according to the methodology the CMA published earlier this year. The focus of the survey will be a sample of main PCA accounts from 13 different providers, representing the incumbent banks, challenger banks (such as Metro Bank and TSB Bank) and banks covering Northern Ireland and Scotland. GfK will carry out around 5,000 telephone interviews with account holders, a higher proportion of whom will have switched and/or opened an account within the last year.

More recently, the CMA has announced that it will be carrying out surveys of SME customers. However, it does not intend to commission a full-scale survey of these customers, as it has done for PCAs. Instead, it plans to analyse existing survey evidence used in the earlier market study on SME retail banking and to supplement this with short interviews with a subset of SMEs (500-1,000 in total).

Responses to Issues Statement

To date the CMA has published 26 responses, coming mostly from financial institutions but also from consumer and business groups. It has also received other submissions from a small number of consumers.

All market players recognise in their responses the paramount importance of this investigation for the industry as a whole. However, they also underline the fact that the investigation as it currently stands appears unbalanced in favour of PCAs, with the SME market being given less weight. The CMA's latest notice on its survey proposal for SMEs (see above) may be seen as further evidence of this.

What the banks say on…

Behavioural economics

The competition regulators in the financial services sector appear to take a different view on whether or not they should use behavioural economics to improve customer research by taking account of consumer bias. The FCA is a keen supporter of behavioural economics and has used these tools in recent market studies, including for example in its market study on general insurance add-ons.

The CMA, on the other hand, has favoured a more traditional approach in past investigations and has undertaken customer surveys. It will continue down this route in the retail banking investigation as shown by the draft PCA customer questionnaire and methodology which it published recently.

Lloyds Banking Group submitted a paper (prepared by Frontier Economics) to the CMA on how behavioural economics can improve customer research in retail banking markets. It points to some examples of where the use of the more traditional customer survey method in retail banking has failed to predict actual outcomes and advocates the use of alternative methods.  Such methods would include field trials, laboratory experiments and measuring the emotional response to certain stimuli and eye movement.

The results of the CMA's customer surveys will be very important in shaping the direction of the investigation. If the results are inaccurate or misleading because of the methodology used, there is a risk that any remedies proposed by the CMA will not be the right ones. Will the statement by the CMA that the PCA customer questionnaire will be "rigorously tested through cognitive testing" be a sufficient defence against possible challenge on this basis?

Current Account Switch Service

Since its introduction in 2013, the Current Account Switch Service (CASS) has been used as an important indicator of the health of effective competition within the retail banking industry. Many players, especially the bigger banks, state in their responses to the Issues Statement that CASS is not fair and true evidence of a competitive environment for customers and that its weight within this market investigation needs to be largely downsized.

The lack of reliability of CASS is mainly attributed to the phenomenon of "silent switching". According to many responses, the vast majority of customers will open a new account whilst retaining their old account, and transfer functions over time, closing one of the accounts only subsequently, without going through any recorded switching channel. Another argument which has been raised by many banks to support the untrustworthiness of CASS is the number of dormant accounts, which has the effect of distorting any industry statistics. The inertia of customers has created a substantial number of PCAs which are neither used nor regularly monitored. These accounts artificially inflate the number of current accounts held nationwide, therefore decreasing the percentage of people switching from one provider to another.

As well as the question of what evidential weight should be placed on CASS, there are a number of outstanding problems with the switching process itself under this mechanism. These include, for example, the fact that the forwarding of payments lasts only for a limited period (highlighted by Yorkshire Building Society). Is it sensible to continue with the same switching system, or is it time for real change?

Remedies

It is no surprise that the various players in the retail banking market have differing views on possible remedies to deal with the competition concerns the CMA has outlined. A number of the challenger banks think that the CMA should consider altering the structure of the market by requiring divestment of some kind. TSB Bank, for example, relies on the OFT's observation in the 2008 PCA Market Study that the optimal market share for an effective competitor was in the range of 5 to 14 per cent. TSB Bank would like the CMA to use this market share range as a starting point in considering whether there are a sufficient number of challenger banks with the scale to offer meaningful competition. Divestment by the incumbent banks would be necessary to achieve change at this level.

Aldermore considers that competition could be rapidly stimulated if the state-owned banks (RBS and Lloyds Banking Group) were to be broken up, particularly those parts of the banks providing services to SMEs, and challenger banks were allowed to acquire them.

There is a greater emphasis by many more of the banks on behavioural remedies. Some players (for example Virgin Money) have suggested introducing account portability in the retail banking sector to deal with the low level of switching. This move has been successful in the telephone and mobile phone sectors, where customers are able to take their phone number with them when they change supplier.

We have already mentioned above that CASS has so far failed to address all concerns of customers. It may be that another possible remedy would be for improvements to be made to this switching service to increase customer engagement and transparency (see, for example, Nationwide Building Society's response to the Issues Statement). Other possible options include requiring banks to send a "prompt" to customers to make them consider switching; and the provision by banks to customers of information in standard format about PCA charges, similar to the credit card summary box that customers receive now from their banks (uSwitch makes this point, for example).