The UK’s Competition and Markets Authority has chosen personal current account banking as one of its first subjects of major inquiry. Well, not exactly: a preliminary investigation has led to a consultation on a provisional conclusion that such an inquiry might be appropriate.
There is at once too little and too much competition in personal current account banking in Britain. This is a paradox. It results from a history of cartelisation and over-regulation, together with more recent experience in finance of a transactions-driven culture with excessive focus on short-term profit.
Until the 1970s, British banks all offered the same services on more or less the same terms. They opened for the same – rather short – hours, chosen to meet the convenience of bankers rather than their customers, whom they treated with haughty disdain. This tight oligopoly was not all bad: the people who worked in banks were scrupulously honest and British banks never went bust.
The process of change began in 1971, with an official paper entitled “Competition and Credit Control” – perhaps the first time in Britain the words competition and credit had appeared in proximity. Developments in the three decades that followed – deregulation and reregulation after the Big Bang of 1986, the establishment in Britain and America of universal banks and financial conglomerates, and the globalisation of finance – accelerated the transformation.
Yet old habits die hard, and it is still true that all banks look much the same to their retail customers. The CMA reports a study by one of the very few new entrants, Tesco Bank, which found that a clear majority of account holders agreed with the statement “I cannot be bothered to switch accounts as I do not believe I would get better service/value for money elsewhere”.
Yet many of the problems that have damaged bank customers are the result of competitive pressures rather than their absence.
Customers are encouraged to make deposits or take out mortgages with teaser rates: inertia means most will stick with these products even when introductory rates shift to unattractive levels. From time to time, well-intentioned executives attempt to treat customers more fairly – the 82 per cent state-owned Royal Bank of Scotland is trying to do just this, promising that existing customers will not be treated worse than new ones. But history shows that competition for new business means that good guys who attempt this approach abandon it when they see the effect on market share.
The mis-selling of useless or virtually useless payment protection insurance to borrowers represented a systematic abuse of their customers. But the size of the margins banks could earn from these policies had the competitive effect of driving down interest rates on the core lending products to unsustainable levels. The sale of loans was viable only if you could sell overpriced insurance along with them. All banks would have been better off if all had agreed to stop this practice – but competition rules, quite rightly, made it illegal to enter such an agreement.
The core problem of the market is the competitive pressure that obliges banks to offer their customers “free” current account banking. Of course, there is no such thing: banks make profits from the current account relationship in other ways. They offer “packaged accounts” with perks that are rarely worth what you must pay for them. They impose unreasonably high charges for other services; international transfer payments and unauthorised overdrafts. They attempt to cross-sell services you probably do not need and could certainly obtain more cheaply elsewhere.
The market for personal current accounts is one in which there are relatively few providers and products, and in which tariffs are complex and multifaceted so that neither the characteristics of the products nor their costs are easy to understand. Competition does not always or necessarily work out well for consumers in such cases, and these features are evident in an increasingly large number of industries; think energy tariffs and mobile phone contracts, for example.
Limited competition may actually yield worse results for customers than either full-blooded competition or a cartel. Perhaps that explains the particularly tentative approach of the CMA.