Terms of reference
It is worthwhile dwelling on the fact that the terms of reference in relation to personal customers included only the supply of personal current accounts (PCAs), which includes overdrafts. In relation to SMEs, the terms of reference extended to business current accounts (BCAs) and some lending products, but they excluded insurance, merchant acquiring, hedging and foreign exchange. That said, the size of the market is enormous, with a reported 70 million active PCAs in the UK, generating revenues of approx. £8.7 billion in 2014. 97% of adults have a PCA and 5.6 million were opened in the UK in 2015.
Findings of adverse effects on competition (AECs)
The report summary sets out the CMA's findings of adverse effects on competition (AECs) within this frame of reference. For example, looking at PCAs and overdrafts (both arranged and unarranged), all of the evidence points to low customer engagement, with surprisingly low numbers of customers switching their PCA to other banks since the introduction of the current account switching service (CASS). This is true even where there are obvious cost savings available to customers who are high users of unarranged overdrafts. The evidence also points to the lack of understanding of account charges and the difficulty of comparing charges, particularly around unarranged overdrafts, and searching for alternatives. Obstacles to market entry for challenger banks are touched on, particularly the high cost of customer acquisition and the effect of capital holding requirements, all of which are more easily absorbed by established banks with an existing broad customer base.
Package of remedies
The CMA sets out a package of remedies that will come into force between now and the summer of 2018 to seek to address these AECs. They invite us to treat the remedies in their totality, the intention being that the combined effect of the measures will be greater than the sum of the individual measures if looked at in isolation.
The package consists of four elements:
1. Three cost-cutting foundation measures which are intended to underpin competition within the report's reference markets, namely:
- "Open Banking" standards - no doubt the next financial services buzzword - intended to leverage recent advances in digital services used on computers and smartphones through the exploitation of application programming interfaces (APIs). These will allow publicly available data and customers' own data to be shared with trusted third parties. 'Open Standard' APIs are also touted as being particularly powerful in opening up new customer information and advice services, though clearly we can't lose sight of security and privacy issues when it comes to sharing banking data. Really we are looking at the next generation of banking apps beyond internet and mobile banking, cashless contact cards and the like.
- Service quality information - where the CMA are requiring banks to display prominently a number of core indicators of service quality, such as customers' willingness to recommend their bank to friends, family or colleagues.
- Customer prompts - intended to be occasional but timely reminders to customers to consider their current banking arrangements and shop around for alternatives.
2. Additional measures to make CASS work better, including building on and enhancing the current service. The aim is to make customers more confident that they can switch their PCA to a different bank without the perceived hassles which currently act as a block on this service achieving its goals of encouraging competition.
3. A set of measures aimed at PCA overdraft users, including: automatic enrolment of customers for unarranged overdraft alerts; requiring banks to offer grace periods during which customers can take action to avoid or reduce unarranged overdraft charges; steps to encourage customers to engage more in considering overdraft features during the PCA opening process; and requiring PCA providers to set a maximum monthly charge (MMC) for use of an unarranged overdraft facility and to effectively communicate that MMC to customers.
4. A set of measures targeted at the specific problems in SME banking, with the aim of making it easier for SMEs to compare different providers of BCAs and SME loans. The CMA are actively promoting online tools (such as price comparison websites) that provide a 'one-stop-shop' to allow SMEs to quickly and reliably compare banks on price, service quality and lending criteria across a whole range of providers.
An awful lot seems to be riding on these measures delivering information to customers to enable them to make informed decisions about their banking arrangements, and to shop around and switch easily between service providers. However, experience has shown time and again that more or clearer information does not always lead to customers making "good" decisions.
Technology is a central theme. The well established banks may be more likely to have the wherewithal to develop these APIs, but many are still struggling with legacy IT issues. This could leave the way clear for the FinTech industry to step in, which then begs the question as to whether the Regulators can keep pace with these digital developments and keep a cap on the risks to both personal and business customer
The reality is that lethargy amongst personal banking customers remains king. Whilst the CMA report that they found that 90% of customers in GB on standard or reward accounts would gain financially from switching to a cheaper product, they also found that only 3% of customers had switched their PCA to a different bank in the last year, and only 8% had switched in the last three years. It remains to be seen whether the CMA's package of measures will energise us all to start shopping around for a new PCA in the same way that we appear happier to shop around for the likes of car insurance and switch energy suppliers on a regular basis.