The house that Big Banks built

The structure is sound, but the decoration is old.

On October 22nd 2015 the Competition and Markets Authority released the provisional findings from their Retail banking market investigation. The findings held no revelations and fell short in the eyes of many industry commentators. Big Banks let out a collective sigh of relief as the report concluded the market required no structural reforms. The free-if-in-credit (FIIC) model upon which most personal current accounts (PCAs) are based is not causing a lack of competition; the root cause is a lack of customer engagement. The question is, how can the industry engage with consumers?

Big Banks dominate competition

Important questions about competition in retail banking raised in reports by Cruickshank in 2000 and Vickers in 2011 highlighted the need for an in depth investigation into the industry. The question of competition is still well founded; the four largest banks (LBG, HSBCG, RBSG and Barclays) dominate the sector, accounting for around 70% of all active PCAs and 80% of active business current accounts (BCAs).

The CMAs investigation has so far found that the banks with the largest market share have the highest average prices with no noticeable difference in quality of service. It is therefore shocking that the four largest banks have collectively only lost less than 5% of market share in the past decade.

The consumers are the barrier to entry

The Big Banks clearly have the majority of the market, but why is that? The CMA has so far concluded that the current market structure (FIIC) is not the issue. Rather it is the consumer’s lack of engagement that has resulted in continued dominance by the major institutions. Whether you agree with the CMA on the market structure or not, with 57% of consumers having been with their main PCA provider for more than ten years, it is hard to argue that consumer stickiness is not an issue. Only 8% of consumers have switched their current accounts in the past 3 years, which is far lower than comparable rates in the savings or energy sectors. Over half of consumers see switching as a hassle and believe something will go wrong. Big banks are benefitting greatly from a ‘can’t switch, won’t switch’ mentality.

What is more concerning for the CMA than consumers not wanting to switch, is the large number of consumers who are not even aware they should be switching. On average, consumers could save £70 per year on their PCA, and up to £260 if they use their overdraft extensively. Despite this, over 90% of consumers reported to be fairly satisfied or better with their current service. There is obviously a huge disconnect between the service and cost consumers believe they are receiving and the reality.

Between not realising the value of switching PCAs, and the perceived difficulty in switching, Big Banks experience little consumer pressure to reduce costs and improve service. This consumer inertia also drives up customer acquisition costs making it very difficult for challenger banks and FinTechs to break into the market.

Challengers and FinTechs have a solution

As discussed in the Moorhouse ‘Millennials and FinTechs’ September insight, challenger banks and FinTechs are delivering value through technology and innovation. With investment in ‘FinTechs’ expected to rise to $20bn in 2015, progress does not look to be slowing. New challenger banks such as Atom Bank, Starling Bank, and Civilised Bank will also provide a new alternative to the Big Banks. It is clear then that the consumer need is there and the solution exists, but how can the CMA match the two?

What will it take to reach consumers?

There are a number of remedies that the CMA highlighted as key in breaking down the barriers to the retail banking market:

  • Banks may have to create ‘trigger points’ to prompt customers to review the service they receive, like they experience with the renewal of a phone contract.
  • Giving consumers easy access to their transaction histories through expanding the Midata service.
  • Creating a new price comparison website for consumers, in line with the EU payment Accounts Directive.
  • Requiring banks to better advertise the current account switching service (CASS).

The question has to be asked; ‘Do these recommendations go far enough?’. In a 2014 study commissioned by the FCA, Moorhouse considered the idea of extending CASS’ payment redirection service. It was concluded that this solution would not be enough, and the solutions most likely to bring lasting change were those that were the most fundamental and technically complex.

So what could be the potential solution to fix the issue of competition? As suggested in the Moorhouse report, a Central Utility Model consolidating customer data and KYC could lead to a ‘one click switch’ for consumers and reduce stickiness. Or, potentially an even bigger and wide reaching solution is needed. Experience has proven small technical changes do not impact ‘sticky customers’. A shift in the British culture of disinterest in the management of our own financial services is required. This could be achieved through a national campaign, like the ones seen for smoking, drink-driving and most recently use of plastic bags. A culture change coupled with minor, technically simple, improvements to CASS may be the most effective way to realise an increase in competition in the market and break the grip of the big banks to benefit consumers.

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