November 24, 2015 by 3 Comments
The UK Retail Banking is undergoing yet another review of competition, with the initial conclusions released a few weeks ago. The full report is in excess of 400 pages – I must confess that I’ve not yet had chance to read it, but one has to assume that the press release is indicative of the tone and content. Which is worrying. At first glance… it’s frankly shocking, and shockingly poor at that. Before I start a war with the CMA (Competition and Markets Authority), who are conducting the review, let make sure we’re clear on the lens that I am using. I cover payments, not banking per se, so I’m looking at this through the eyes of a consumer. Remember, this is the very group that CMA is trying to help. As predicted, the new and improved switching service provided a brief, temporary lift, but has pretty much reverted to the same level of switching that has existed for the last 10 years. My thinking has always been that the switching wasn’t the issue, but the fact that few consumers perceive there is little benefit to be gained. In short, most consumers believe that most banks offer pretty much the same thing, and at the same price. Imagine my shock then reading the official press release: “Despite [some] encouraging developments, because too few customers are switching, banks do not have strong enough incentives to work hard to compete for customers through better products or cheaper prices, and smaller or better banks find it hard to gain a foothold.” Sooooo, basically you’re not getting better products because you’re not switching. Surely that can’t be right?! It continues: “The CMA says: “The problems in the market are unlikely to be resolved by creating more, smaller banks; it is the underlying issue of lack of switching which has to be addressed.” Now, I’ve taken the quotes somewhat out of context – please read the full release – but the remedies proposed focus heavily on the switching, and not the underlying issue. The CMA seems to think that there is both differentiation and ways of finding the accounts. Both these points I believe to be deeply flawed. Differentiation The release suggests that “heavy overdraft users, in particular, could save up to £260 a year if they switched, and on average, current account users could save £70 a year by switching”. I suspect the key word is average. Do they mean mean, median or mode? UK bank accounts operate generally on a fee free basis, but with heavy penalty and overdraft fees. To save £70 on average implies the average person is overdrawn most of the year (i.e. they’re still overdrawn, but paying £70 less). £70 is £70 – but equally, it’s only 2 Starbucks a month. However, the bigger issue is that the assumption that the alternate bank would actually offer them an account with the overdraft they seek. Lending criteria has tightened up significantly over the last few years – most UK consumers have had the overdrafts and credit card limits reduced, and remortgaging is now frankly very hard work. I recently had to supply more than 15 additional documents to remortgage a house which 3 years ago took no more than 10 mins for a decision to be made, and where the value has risen by 20%. The reality then is that the heavy overdraft users simply won’t ever get a better deal as their existing bank, if they’re accepted as customers at all. The “average” UK consumer won’t see any benefit at all – if they don’t go overdrawn, it’s very difficult to see where the savings will come from. Which just leaves a very small set of people who will benefit. The switching service needs to be measured against this set of people, not against all those who won’t switch! Comparison But perhaps I’m wrong? How can we find out? This element really surprised. One suggestion was: “Making it easier for consumers and businesses to compare bank products by upgrading Midata, an industry online tool, launched with the support of Government, that gives consumers access to their banking history at the touch of a button. Midata allows consumers to easily access their banking data from their bank and input it directly into a price comparison website which can then analyse their transactions, and alert them to available bank accounts which best suit their needs. An improved Midata could have a radical impact on consumer choice in retail banking markets” What?? Midata? What is Midata? Considering that the switching service has been heavily promoted, by the banks and on TV, the fact that I’m both a consumer and in the industry and have never heard of it, nor could I readily find details on it, speaks volumes. As a family, we have accounts at 4 of the 6 banks signed up. Not one, to my knowledge, have ever told me about it. My main bank has one single mention of it, as the last item in an obscure FAQ page. I’m also uneasy that a well-known comparison website is hosting the service. Whilst the data is anonymized, I assume the site knows a fair bit – cookies will show I used the service, and so the ad’s will be served up to me based on my searches. Given that comparison sites get paid from ad revenue and lead generation, it feels a little too cozy. Not implying everything isn’t above board, but it undoubtedly put me off using the service. So, enough ranting, where does this lead us? As a consumer, I suspect probably worse off. Further change will cost more money – and it’s the customers who will foot the bill. There is also the danger that the more affluent, who already play the system, will be the ones who benefit, whilst those at the opposite end will just find things harder. It would seem then at first glance (i.e. without having read the report in full yet) that CMA has potentially not only got it wrong, but is set to make things worse.