The Competition and Markets Authority has issued its final report on the retail banking sector, following a two-year market investigation. Its main conclusion is that customers do not switch banks enough and new technology must be developed to allow customers to understand their banking charges and to compare the charges of other banks. This will be called “Open Banking” and will involve banks working together to implement a new digital “app” to allow the secure sharing of data and increase customer switching between banks. 

Other key remedies include the mandated publication of information on service quality, a cap on overdraft charges and an obligation to notify customers of certain events (branch closures or increases in charges) to serve as prompts for customers to decide whether they wish to stay with their existing bank. 

The CMA has still to publish the full text of the report or the detail of how it will implement the remedies.

Links to relevant documents can be found here.

What was the CMA’s verdict on the retail banking sector? 

In summary, the CMA found that getting new customers is difficult and costly for banks, above all for new entrants to the banking sector and for smaller banks. In more detail, the CMA’s diagnosis is as follows: 

  • The CMA considers that charging structures for current accounts for both personal and business customers are variable and too complicated and that customers are unable to judge the value of the service they receive, since they are generally unaware of the cost of comparable products and services at other banks. 
  • The CMA believes that this is particularly true of overdrafts. 
  • Personal and business current account relationships are open-ended and do not have regular trigger points, such as renewals, which might be expected to prompt them to shop around. 
  • The Current Account Switch Service (CASS), which is meant to facilitate current account switching, is not widely known and (in the CMA’s view) is unfairly mistrusted. 
  • The account opening process for small businesses can be lengthy and onerous. 
  • Almost all start-up businesses open their current account at the bank where the business owner has their personal account, since small businesses find it hard to work out who is the best lender for them.

What is Open Banking? 

The CMA’s summary identifies fifteen remedies. For all the complexity of the remedies package, however, the rationale behind the CMA’s reforms can be summarised in one simple phrase: the power of technology. The CMA believes that, by harnessing technological developments, they will allow banking products to become more transparent to an increasingly tech-savvy population. 

They will achieve this through “Open Banking”, which will be based on Application Programming Interfaces (APIs), which are used in other consumer digital applications such as Facebook, Google Maps and Uber. Open Banking will involve requiring banks to develop a secure API standard within a timeframe to be stipulated which will allow access to information about banking services. 

The exact details of the process and content of the Open Banking API and how cybersecurity will be achieved will be developed in due course, including “the availability of appropriate and speedy redress” to cover any breaches of security.

What else is the CMA looking to do? 

There are three so-called “foundation remedies” and are measures to encourage switching, relating to overdrafts and relating to SMEs. Core highlights of the package are:

  • Banks will be required to send alerts to customers going into unarranged overdrafts to inform them of a grace period in which they can avoid 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 innovation charity Nesta in a new initiative to address this issue and will introduce a range of other measures targeted at small businesses such as a loan eligibility tool.

One of the most notable aspects of the CMA’s remedies package is that it does not pursue the more radical option of divestment remedies, i.e. it does not mandate the break-up of individual banks, since it decided that there was no evidence to suggest that market structure was the principal cause of the problems identified. 

Conclusion: what are the issues to watch in the future? 

The CMA’s final remedies package shows a clear focus on technology and information as drivers of customer behaviour and above all as likely to influence switching between accounts. The cap imposed on overdraft charges is a significant pricing remedy, but the other remedies are based on information. In general terms, there may be practical challenges in implementing a wide range of information-based remedies in a uniform fashion across such a broad sector in a way which facilitates genuinely transparent comparisons. The main challenge however may lie in a workable API which works securely in every case. Unless cybersecurity is guaranteed, there is a risk that the new technology leads to reduced consumer confidence. 

The CMA’s own press release describes Open Banking as a “revolution”. Regardless, it will be interesting to see if the new app will lead to fundamental changes in consumer behaviour.