After completing an investigation on the retail banking market, the Competition and Markets Authority (CMA) has found that consumers are paying more to bank but are not benefitting from the financial services that are available to them. The report said that “older and larger banks do not have to compete hard enough for customers’ business, and smaller and newer banks find it difficult to grow.” In order to solve this problem, the CMA aims to implement requirements that banks have to follow so that user experience for customers is simplified by 2018.
What is open banking?
- Open banking uses APIs, application programming interfaces, to share information securely without revealing passwords.
- The application interface would use transaction information to find an account that best suits the customer, or loan for a small business.
The new proposals will speed up the adoption of open banking and accelerate technological change in the UK retail banking industry. The report explained that this could mean that businesses can share data securely with banks and in turn, have the ability of managing multiple accounts with a single application. As well as this, customers can opt to recommend their bank to friends and family or subscribe to alerts that would inform them about branch closures or fee increases.
The CMA has consumer satisfaction at heart and has reported on the benefits of switching bank as present, only 3% of personal and 4% of business customers switch to a different bank in any year. “This is despite, for example, personal customers in Great Britain being able to save £92 on average per year by switching provider, with savings of around £80 a year on average available for small businesses,” the announcement read.
Head of Money at comparethemarket.com, Jody Baker, commented on how there are only a small number of people who switch current accounts. “There are two key drivers of this lack of competition – awareness and fear. One potential solution to this widespread consumer inertia is introducing account number portability.” comparethemarket.com research revealed that more than a third of those surveyed decide not to switch accounts because they believe that direct debits would not be transferred successfully. Also, over 50% said that they would change banks if it meant they could take their account number with them, which is what Baker suggested.
The CMA also aim to help the 25% of personal current account holders and small businesses who have unarranged overdrafts. At the moment, banks make £1.2 billion a year from overdraft charges and research from the Financial Conduct Authority (FCA) found that mobile alerts informing customers of a grace period will minimise these charges from being made. As well as the implementation of this, banks will have to set a monthly cap on charges and tell their customers about it.
Maya Barkay, Product Marketing Manager of Mobile Financial Services at Amdocs, said that the mobile has been perceived as a luxury for the British banking population as financial institutions have only offered limited services on this device. However, in countries such as Kenya and the Philippines, the mobile phone is helping to provide financial services to the un(der)banked. “Regulation has time and time again been proven an essential enabler to mobile financial services, and this new ruling from the CMA is ensuring that British citizens will finally have the opportunity to harness mobile financial banking in a more useful and user-friendly way,” Barkay said.
On the other hand, Michael Allen, VP EMEA at Dynatrace, does not think that mobile banking applications is the solution. “From the consumer perspective this is great, but what happens when there is a problem with the app, like an account doesn’t load or the app runs slowly? Who will they blame for the problem and who will be responsible for solving it? For banks, this is going to raise some interesting questions about how they manage and control the consumer experience, even though they aren’t ultimately responsible for all the services being provided through the app.”
On a separate note, Sophie Guibaud, VP of European Expansion at challenger bank Fidor highlighted that consumers have been affected by complicated current account prices for too long and the time for change is now. "In the future, we believe that more people will end up switching their banking services to different providers when they see clear differences in the offers available to them. With new banks coming to the market with more innovative and targeted offerings, the percentage of people switching services in the future will certainly increase," Guibaud said.
Small businesses are also lacking in the tools they need in order to obtain important information about bank charges, service quality and credit availability, so the CMA is working with Nesta, an independent charity who is working to promote fintech and open banking. Nic Beishon, Head of Commercial at Equifax UK & Ireland, believes that the improvement of SME lending services is significant when it comes to increasing competition.
“We are in an uncertain environment for the UK economy and all moves to support our smaller businesses should be welcomed. Mark Carney has given banks ‘no excuse’ not to pass on rate cuts. These tools will bypass time-consuming paperwork and make it much easier for SMEs to find out if they’re eligible for loan,” Beishon said.
Beishon continued to say that banks should make implementation of these services a priority and ensure that they have the right technology in order to support this new way of lending. Only HSBC, Barclays, Lloyds and the Royal Bank of Scotland have the ability to provide these services at this point, but as Beishon states, other lender and challenger banks, such as Fidor, “should introduce the same tools to ensure their offering stacks up against larger players.”
As a member of the Open Bank Working Group that was set up last year, Louise Beaumont, Head of Public Affairs at GLI Finance, said that technology and innovation has the potential to reshape the banking sector. “Our hope is that [the CMA] will continue to exert pressure on traditional banks to harness the power of technology to provide SMEs with quicker and broader access to the range of financial products they need to help fuel growth. Make no mistake, this report marks the coming of age of fintech and we must ensure that all stakeholders embrace the potential benefits this can deliver to customers.
“Whilst the measures on overdrafts should be welcomed, we must not forget that this shift is taking place against a backdrop of SME overdrafts being significantly scaled back by traditional banks, a move which is starving many businesses of a vital source of oxygen as they seek to weather a very difficult economic climate. Our hope is that through effective implementation these various measures will combine to not only deliver significantly better outcomes for customers but also help play a role in injecting genuine competition to deliver much needed economic growth as UK plc adjusts to a post-Brexit environment,” Beaumont said.
Alasdair Smith, Chair of the retail banking investigation, said that these changes will revolutionise the banking sector for many years to come. “We are breaking down the barriers which have made it too easy for established banks to hold on to their customers. Our reforms will increase innovation and competition in a sector whose performance is crucial for the UK economy,” Smith said.
What should banks do next?
- Development and adoption of an open API standard
- Measure service quality
- Cooperate with FCA research and trials
Further industry comments:
Mike Blanchard, Head of Customer Intelligence Solutions, SAS UK & Ireland:
“Governing bodies have once again reaffirmed their commitment to protecting the interests of customers by handing power back to the consumer. Despite nearly 60% of current account customers staying with the same bank for more than 10 years, consumer confidence in financial services remains low. As a result, we are seeing a new army of entrants emerge that have developed a customer-centric approach to capitalise on the perceived lack of care and attention that the finance sector has historically shown.”
Anthony Duffy, Director of Retail Banking, UK & Ireland, Fujitsu:
“The CMA’s central reform, the implementation of “open banking” by early 2018, is to be welcomed. It will encourage further development of, and investment in, digital banking services and make it easier for customers to compare and contrast the products offered by different providers. The effectiveness of the CMAs proposal to cap overdraft fees is less clear. Most bank already limit their charges for facilities agreed between bank and customer, while fees for unauthorised overdrafts remain outside the scope of the CMA’s recommendations. And it will be interesting to see how a new regulator, to oversee the Current Account Switching Service, can help improve on the 3% of customers who move their accounts each year.”
Melba Foggo, Managing Director, Sopra Steria Financial Services:
“What we’re seeing today is a move towards the opening up of banking, forced by the growth of digital technology and new regulation. There has been a lot of momentum around Application Programming Interface (API) technology recently and this has created a novel, interesting dynamic between traditional high street banks and challenger banks. The CMA’s Open Banking programme is clearly based on the HM Treasury initiative, powered by the Open Banking Working Group (OBWG) who are determining the open API standards for Open Banking; by amplifying this and supporting this, the CMA is accelerating the move to a new banking landscape. Traditional banks will need to think about how to reinvent themselves to make the most of these changes; adjust their role in the market; and reassess their relationship with their customers, third parties and new entrants, who will also benefit from secured access to customer account information. It is an important opportunity for all banks, whatever their size or maturity.”
Read the full report here to find out what you are required to do.