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What effect does the recent takeovers have on the current account market?

29 September 2008

By Peter Vicary-Smith, chief executive, Which?

Let's forget for a moment that Lloyds TSB agreed to take over HBOS to create a mega-bank that now makes up a third of the current account market. Even without this unprecedented event, there were already serious questions about competition in the current account market.

The OFT's market study published in the summer shone a light on some of the darker corners of the retail banking model and backed up what we at Which? have been saying for some time – that real competition between banks is limited, consumers don't know how much they pay for their current accounts and, as a result, there is very little switching between banks. People have different banking requirements, so we need more competition, not less.

Now that the Government has bypassed its own competition rules to allow the creation of this new mega-bank, industry innovation is vital to ensure that consumers don’t lose out because of the dominance of one major player.

Markets work best when consumers are well-informed about the products they are purchasing and firms are genuinely incentivised to compete for new business on the basis of transparent products that perform in the marketplace.

Sadly, this hasn't been the case with the current account market for some time and there is a real danger that the Lloyds'/HBOS merger will compound the situation. In order to address this we must look boldly and radically at what can be done to increase transparency, stimulate competition and deliver real benefits to consumers.

The first step is transparency. Banking in the UK is not free, and nor should it be; but at present, consumers do not understand how they pay for their accounts – whether through the disproportionate fees still being levied on unauthorised overdrafts, or through the billions of pounds of interest foregone that makes up such a large part of retail banking revenue. We observe significant underground pricing and cross-subsidisation in the market resulting in consumers not knowing what they are paying for.

A good starting point  when looking at options for change will be the remedies imposed in Northern Ireland by the Competition Commission, following the supercomplaint to the OFT from Which? and the Consumer Council of Northern Ireland.

We wholly support the Competition Commission's demand for easier to understand descriptions of current account services, charges and interest rates; and for these to be made available to consumers on a regular basis. We would also support an annual summary of charges and interest, and an annual reminder of a customer’s right to close their account and switch.

Annual contracts in other financial products like car insurance act as a spur for a consumer to consider their choices and encourage a more competitive market driven by consumer choice. It seems clear that a spur to make a decision such as a renewal letter forces providers to demonstrate why their product or service is the best. In the absence of that inertia will predominate so we should introduce annual statements.

A further idea we would like to put to the industry is whether a consumer's average balance, over the preceding month and year, should be included on their monthly statement. Making this information available in a personal form would allow any consumer to assess how they are being rewarded for their credit balances, and could greatly increase the ability of the individual to shop around. It would allow the creation of comparison tables to facilitate switching for those consumers who want to maximise the benefits of their credit balances. It would crucially create a means to allow consumers to assess the financial benefits of one account over another.

The introduction of portable account numbers would make it easier to switch and to stop consumer’s number one fear of their direct debits going astray during the process. This fear is recognised in the OFT study. The Which? current accounts survey of our members in 2008 found 20 per cent of those who had switched had problems with the companies that their direct debits were set up with. Portable account numbers would address this problem. The idea deserves to be considered fully, even though some will dismiss it as unworkable or too costly to implement.

We would also like to see shared banking facilities between different providers, particularly in rural areas. If access to a branch network is a key barrier to smaller banks and new entrants gaining market share, then all options to encourage competition are worth consideration.

Finally, the most public part of our work at Which? has been in opposing disproportionate charging structures on unauthorised overdrafts. The banks' collective failure to allow consumers to opt out of having an unauthorised overdraft and the associated charges at all, must be addressed. The OFT study echoes this issue and found over 60% of consumers would prefer to have their payment refused rather than enter an unauthorised overdraft.

The last week has seen a seismic shift in the banking industry. The rule book has been ripped up but we must ensure that this isn’t at the long-term expense of consumers, and use it as an opportunity to implement radical and beneficial reforms to the current account market.

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