The new Competition and Markets Authority has chosen personal current account backing 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 enquiry might be appropriate.

There is at once too little and too much competition in personal current account banking in Britain. This paradox is  the result of a toxic combination of a history of cartelisation and over-regulation 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 the bankers rather than their customers, whom they treated with haughty disdain. This tight oligopoly wasn’t all bad.  The people who worked in banks were scrupulously honest, and British banks never went bust; both very desirable characteristics of a banking system.

The process of change began in 1973, with an official paper entitled ‘Competition and Credit Control’ – perhaps the first time in Britain  the words competition and credit had appeared in close proximity.  Developments in the three decades that followed – deregulation and reregulation around Big Bang in 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 that most will stick with these products even when introductory rates revert to unattractive levels.  From time to time, well intentioned executives attempt to treat customers more fairly – the 82% state owned Royal Bank of Scotland is currently attempting 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 try this approach abandon it when they see the effect on market share.

The misselling of useless or virtually useless payment protection insurance to bank borrowers represented a systematic abuse of their customers by banks.  But the size of the margins banks could earn from selling these policies had the competitive effect of driving down returns 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.

And the core problem of the personal account market is the competitive pressure which obliges banks to offer their customers ‘free’ current account banking.  Of course there is no such thing as  ‘free’ banking : 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 – try making an international transfer payment, and avoid at all cost incurring an unauthorised overdraft. They attempt to cross-sell   services that 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 multi-faceted,  so that neither the characteristics of the products nor their costs are easy for customers 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 or monopoly.  Perhaps that explains the particularly tentative approach of the Competition and Markets Authority.