| UK Competition and Markets Authority orders banks to digitalise and begin "open banking" by early 2018 but misses a major opportunity to force them to change their behaviour as watchdog relies on mobile apps, own bank determined usury ceilings and consumer switching measures. |
The UK Competition and Markets Authority (CMA), tells British banks that they must digitalise. The CMA has spent the past two years (and GBP 5bn) investigating the banking industry. Its final report of the market investigation into Retail Banking, published this week reveals plans and implementation dates in 2017 and 2018. In its report Making banks work harder for you, they have ordered the UK banks to help digitalisation within two years or face regulatory fines. The UK authority relies on new technology to provide good consumer outcomes as its sets the term “Application Programme Interface (API)” to play a big role for consumers but who will provide these services? open banking or shadowy banks?
Reform to UK bank accounts for consumers and SMEs?: The CMA has concluded that new phone-based apps will show customers which banks may offer the best account, and banks will also have to set maximum monthly fees for unarranged overdrafts (as the CMA decided against a cross-industry cap, leaving individual banks to set their own charges). Banks are forced to share their customer data with third-party app providers (with consent) and other measures will also encourage people to switch their accounts to other providers. The report contains an analysis of the shortcomings of competition in the markets for current accounts and actions to be taken to fix the problems found. Positive developments (entry by new banks with some with new business models, offering specialist products and tech ones such as digital-only banks; Adoption of mobile banking; new non-bank payment services providers) are overshadowed by many remaining problems especially affecting overdraft users and smaller businesses.
The main measures in the report are:
- “Open Banking programme”, that banks must share their customer data with third-party app providers (EU PSD 2). Customers have to give their consent before this happens.
- All banks will be required to introduce a Maximum Monthly Charge (MMC) to limit the costs of an unarranged overdraft. The MMC will include debit interest – typically charged at up to 20% a year – and unpaid item fees. At the moment most banks cap overdraft fees, but then add on interest payments. (The CMA said this would make different bank accounts easier to compare, and cut through the complexities of overdraft charges. Banks will also be required to send customers text alerts, whenever they go overdrawn - something which most banks already do).
- New measures to encourage more people to switch their accounts to other providers (current switching only 3% of personal customers p.a.) 1) a new regulator to oversee the Current Account Switching Service (CASS); 2) a longer redirecting period (3 years); 3) a “long-term” promotional campaign to encourage more switching.
Overdrafts: All the banks will be required to introduce a Maximum Monthly Charge (MMC) - set by themselves - to limit the costs of an unarranged overdraft. At the moment most banks cap overdraft fees, but then add on interest payments. The MMC will include debit interest - typically charged at up to 20% a year - and unpaid item fees. The CMA said this would make different bank accounts easier to compare, and cut through the complexities of overdraft charges. UK consumer groups say these measures don’t go far enough because monthly charge cap is not actually a cap as banks can continue to charge high fees for so-called unauthorised overdrafts.
Competition and switching: The CMA has done very little to inject more competition into banking. The most radical proposal that the competition watchdog has come up with to break the grip of the big boys is the introduction of smartphone apps that enable customers to see the charges they pay for banking services. The Big Four (Lloyds, RBS, HSBC and Barclays) still control 77% of the current account market for consumers (and 80% for small business accounts) a share that has barely changed since the financial crisis. Added fees paid by the average customer is GBP 116 a year and low switching to date. The CMA reckons the proposals could save customers £1bn in five years based on an estimated 90% of customers switching their current account. For the average customer, switching to one of the five cheapest products could save them £92 a year.
Some questions: UK banks are sparred strong rules as customers are left to tackle the problem on their own. Banks are protected although they have collectively thrown away £55bn on fines for bad behaviour since 2011. Will consumers be in a better situation with more information about prices, standards and the location of branches? Will apps help consumers see which bank is cheapest, given their particular pattern of borrowing? Will all consumers have the tools or skills to do this? Will they be willing to share their data for this to happen? Can a mobile phone app really stop banks from ripping consumers off?
In his post, blogger and digital expert Chris Skinner points to the analysis of the CMA’s report from Financial Services Club member John Gilbert from his research note where he highlights that overdraft usage has increased to a record level and that people borrowing by overdraft are the least confident of all intending borrowers and more likely to be in need of financial advice. |
| ID: |
49050 |
| Author(s): |
SCR |
| Publication date: |
11/08/16 |
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Created: 11/08/16. Last changed: 11/08/16.
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