Four banks — Lloyds, RBS, Barclays and HSBC — have over 70% of the personal current accounts in the UK between them and over 80% of the current accounts of small businesses. This is not a new situation, it was identified 15 years ago in an official inquiry.
The respective market shares of the individual banks hardly changes. Very few personal customers switch bank (only 3% last year), partly because of inertia, partly because changing bank accounts always involves hassle and sometimes financial loss, and partly because of a view that all banks are the same so why bother changing?
Profitability on both personal and small business accounts is low (banks can make much more money from other products such as mortgages, credit cards and insurance) so they don’t compete very hard and they don’t have to — nearly 60% of customers have been with their bank for ten years or more.
New banks, either from outside Britain, new start-up businesses or spin outs from supermarkets have tried to get into the market, but the going has been slow. Santander bought two failed ex-building societies and the relaunched TSB and Virgin Money bought the wreckage of Northern Rock, but there is a sense of deckchairs being rearranged rather than any fundamental shift in the market.
None of this would matter if all banks gave excellent service, but they don’t. Customer satisfaction with the treatment they get from their banks is low — they aren’t trusted and they certainly aren’t liked. Yet current accounts are vital to us as individuals (97% of us have one) and to businesses. The plight of small businesses, especially since the financial crash, has been particularly highlighted and there is evidence that their difficulty in obtaining bank finance is holding back growth in the economy.
Now imagine that you were a member of the Competition Commission reviewing all this, with the knowledge that the problem had been picked over many times before and all previous remedies had proved to be ineffective — nothing had changed. What would you suggest?
Break up the big banks?
My own answer to that question is a matter of public record (see Smaller, Greener Banking), which is one reason (of many) I will never be asked to serve on the Commission: break up the big banks. There may not be any written agreement, no email trail, or recorded telephone conversation, but there is prima facie evidence if not of a cartel then at least of the use of market muscle to inhibit effective competition.
Yet that solution is ruled out in just a few paragraphs in the Competition Commission’s preliminary findings of its 18 month investigation into retail and SME banking. On page 42 of its 47 page description of proposed remedies, it concludes:
”Our analysis found that longer-established banks, with larger market shares, tended on average to charge higher prices and/or provide lower quality than newer banks with lower market shares. We considered, however, that this was more likely to be explained by weak customer engagement and these banks having a larger base of established customers and a higher proportion of inactive customers. Consequently, we could not conclude that high market shares led directly to higher prices.
“From this it follows that breaking up a large bank which has a high proportion of inactive customers paying relatively high prices might simply create two smaller banks, each with a high proportion of inactive customers paying relatively high prices. The disruption caused by a break-up, as customers were transferred between banks, might have a positive effect of increasing customer engagement during a transitional period but we did not consider this to be a sufficiently strong rationale for proposing such an intrusive remedy.
“There is thus no obvious reason why the impact of one or more new banks would materially increase engagement across the market as a whole. In a market characterised by low levels of customer engagement, as we have provisionally found, it seems to us unlikely that creating a new ‘challenger’ bank through structural break-up is the most effective way to increase customer engagement; and that measures directly targeted at improving the customer journey and engagement as discussed above are more likely to have the desired effect and at lower cost.”
That reads to me as: “we have identified lack of competition as the problem and have concluded that more competition is not the answer.”
Inefficient Goliaths – but no David
The remedies which are suggested include requiring banks to send customers messages at certain “trigger points” prompting them to review their accounts, making it easier (via an upgrading of Midata, a government initiative of which, like me, you may not previously have heard – though it was introduced in March 2015) to access your banking history and thus to assess whether you would be better off elsewhere, and improving the CASS — the Current Account Switch Service.
You would be forgiven for not having heard of the CASS either. It was introduced after a previous inquiry in 2011 and is intended to make switching between banks easier, but has been ineffective so far. Few people know about it and even fewer use it, but apparently its advertising budget has been increased, so all will be well.
The UK has one of the most concentrated banking markets in the world, the result of successive governments waving through takeovers and mergers, eliminating regional and local banks to create four “too big to fail,” inefficient Goliaths, which serve their customers and their shareholders badly and create a continuing liability for the taxpayer. Yet once again we have missed a chance to do something about it.
A last word about Scotland: if the situation is bad in the UK, it is worse north of the border, where just two banks, RBS and Bank of Scotland, owned by Lloyds, have a 70% share. Yet the commission does not think the market any different and the Scottish Government, despite publishing an excellent banking strategy document a few years ago, did not give evidence to the inquiry. Its mind was on other things perhaps?
This blog first appeared on the author’s personal site and is reproduced here with permission