The Office of Fair Trading (OFT) last year published a review of the personal current account market, only to conclude that the market was lacking in competition and failing to consider consumers’ best interests. “Concentration remains high, new entry infrequent, and switching low,” read the report, causing consumer scepticism to mount and talk of a full-scale investigation to gather support.
However, alternative sources accused the OFT’s findings of being ill-founded, pointing out that many banks had introduced attractive interest rates and tackled rival institutions head-on with increasingly competitive offerings. Deloitte’s lead Financial Services partner Nick Sandall, for one, contradicted the claims made by the OFT and highlighted the various ways in which the market was improving. “It is optimistic to think that market forces alone will bring about the change in current account pricing that the OFT is seeking,” he wrote in a press release.
“Deloitte’s research suggests that competition in the market for UK current accounts is fierce, with banks paying customers up to £200 to switch accounts. Meanwhile, high street banks are also investing in very innovative functionality around mobile access, loyalty programmes and banking applications – most of which are offered free.” The more optimistic outlook of the two appeared to be well founded when the Payments Council announced that the number of customers that had chosen to switch current accounts in December had risen 54 percent on the previous year.
Leading the charge
The rate of change in the current account market has since shown no sign of slowing, spearheaded by a number of path-breaking institutions whose goal it is to weather market changes by putting customers’ best interests front and centre. Lloyds Bank made its presence known in the revitalised current account market earlier this year by offering an interest rate – on balances between £4,000 and £5,000 – of four percent, rivalling even the rates on most savings accounts. The bank claimed savers could stand to gain as much as £196 in interest a year and, what’s more, promised a four percent interest savings account to match.
Even generous incentives are not enough to move customers from
the familiar
Not exclusive to Lloyds, various institutions are offering increasingly attractive packages for new and existing customers. The TSB Plus Account offers up to five percent interest on deposits of £2,000 or less, whereas Nationwide’s FlexDirect offers a five percent interest rate for deposits up to £2,500 for the initial 12 months.
These new and improved products have come as a response to various industry changes, one of which being increased competition from non-traditional retail banking rivals such as M&S Bank and Tesco Bank, who together pose a threat to the already established breed of high street banks.
“What M&S Bank does is provide our customers with convenience and choice,” said one M&S Bank spokesperson. “Our branches are open almost twice as long as traditional high street bank branches and our current account customers also have 24-hour access to a UK contact centre, as well as 24/7 online and telephone banking. Convenience and choice is critical to meeting customer needs and we’ll continue to see more innovation to deliver this.”
Although the influence of new market entrants is clear, the extent by which the market’s leading players look set to lose their oversized piece of the pie is not. “The new entrants must show they can deliver a genuine consumer-friendly alternative to break the unhealthy stranglehold of the six big banking groups which still control 94 percent of the current account market,” said a spokesperson for the consumer association Which?.
“In fact, the banking sector has become even more concentrated in the economic downturn and there are many signs the market is not working well for consumers, including a lack of innovation, lack of transparency around charges, and an inability to compare accounts.”
Switching issues
However, some well-meaning industry bodies have made it a priority to focus on account-switching initiatives in an attempt to undo the dominance of the industry’s leading players and boost competitiveness. The process of switching accounts has long been looked upon by consumers as an extraordinarily problematic and complicated business, despite there being a number of incentives for doing so.
Regardless of uncompetitive rates and a lack of consumer focus, the vast majority of customers have long been unwilling to switch to improved providers. Even generous incentives are not enough to move customers from the familiar.
Research conducted by Santander last year found that UK residents switched romantic partners more often than bank accounts, showing that the average account relationship lasted little over 16 years and that one in six stay with the same bank for 30 years or more. The research also coincided with findings by Mintel, highlighting how the current account market is dominated by the country’s big five banking groups – Lloyds, HSBC, Barclays, RBS and Santander.
In an effort to overturn this misguided sense of consumer loyalty, the Payments Council has recently introduced a mechanism that enables customers to switch accounts in no more than seven days, in effect ushering in a new era of competition. Covering the entirety of the current account market, the initiative means that any costs incurred in the switch from old to new will be carried over, and all payments that are mistakenly directed to the previous account are automatically redirected to the replacement.
“All in all, this provides a new switching service that is quick, simple, hassle-free and backed by a guarantee, thus eliminating the barriers to switching that previously existed,” said Mark Bowerman of the Payments Council. “Customers now have the confidence, freedom and flexibility to move to a new bank or building society quickly and simply, with no obstacles in their way.”
The introduction of the Current Account Switch Service also marks the first time that the process will be supported by a consumer guarantee, protecting customers from poor service and money lost as a result of the process. Ultimately, the mechanism lands a lot more power in the hands of the consumer, and means that retail banks will no longer be afforded the luxury of knowing that too many obstacles stand in the way of lost custom.
“Previously it was the norm to stay with one bank for several years, because when you weren’t happy with your current account, there was very little incentive to move elsewhere,” said Jafar Hassan, Personal Finance expert at uSwitch.com. “This has changed – current account providers are beginning to notice that more and more consumers are willing to switch when there’s the prospect of better service, interest rates, overdraft terms or even cashback.”
As a result of new and improved switching mechanisms, generous incentives are livening up the market for current accounts. For example, First Direct offers customers £100 for switching to their 1st Account, as does Halifax in the event of a customer switching to any one of their three current accounts. Alternatively, Secure Trust Bank – for a £5 charge – offers a four percent cashback perk on purchases in any one of its 35 participating high street partners.
“Recognising that it is now easier for customers to switch means that any current account provider ought to be able to increase their market share by offering a better service and better products than their rivals. In addition, banks and building societies will need to work harder to keep their existing customers,” says Bowerman.
The Centre for Economics and Business Research estimates that the initiative will increase the number of switchers by over a million annually, bringing the yearly figure to 2.5 million by 2023 – a far cry from the 1.3 million in 2012. However, some estimates aren’t quite as optimistic about the initiative’s effects. Research led by uSwitch shows that as little as two percent of people have switched accounts since the seven-day guarantee came in, estimating that only 4.2 percent will switch this year. “This suggests that seven day switching is not the game changer that will significantly increase competition in the market.”
What is crucial for the current account market moving forwards is that it fosters a culture of openness. Current accounts should be dictated not by some warped sense of loyalty, but seen as immediately accessible and comparable, with the deciding factor for customers above all else being value.
“Unless banks make it easy to compare the cost of running a current account, the new switching guarantee alone will not transform switching rates or significantly increase competition in banking,” says a Which? spokesperson. And while the past 12 months have certainly been a landmark year for current-account competition, the market must improve further still if consumers are allowed a fairer say in how they decide on the right account.
