Close but no Cigar
The CMA’s recommendations just don’t go far enough
Amongst the 405 pages of the CMA’s report  on competition in retail banking are recommendations that will shape the development of personal and business banking for years to come. There are many good things in this report for customers but it doesn’t tackle the industry at a structural level and we believe it will do very little to loosen the powerful grip of the big banks.
The CMA – the UK watchdog responsible for competition – has concluded that the UK banking industry needs reform. It does. The sector remains dominated by a few enormous banks that stubbornly control the pace and direction of change. As a whole, the industry has been slow to innovate; to become more efficient; to improve customer service and to welcome new entrants. That doesn’t feel like a well-functioning market.
The CMA attributes much of this to a lack of transparency of information and to obstacles that prevent customers changing banks. We wholeheartedly agree that these are big problems; if you don’t understand your bank’s charges or cannot compare them with others you can’t know what you’re missing; if you aren’t confident that you can switch your current account provider without your direct debits being messed-up you probably won’t risk it. This fosters an inertia where only around 1.5% of the population change their current account every year – and it has been like this for decades. Banks subsequently make a lot of money out of these types of frictions from hidden charges, poor rates and cross-subsidies.
It can and should be so much better and there’s no shortage of new banks and technology providers trying to make it so.
A number of remedies have been proposed by the CMA to address these issues including:
..Open API * which means that aggregators can connect to several banks to gather transaction and balance data and so help find the most suitable products for customers given their personal circumstances. ..A requirement to alert customers when they start to use unarranged overdrafts. ..Mandatory publication of quality standards such that each bank would be required to make available the results of independent surveys on customer service quality. Steps to improve awareness of the Current Account Switching Service (CASS) so that customers gain confidence in their ability to change their banking arrangements.
This is all good stuff that will make a difference and we support these measures. We see a world where customers are much better informed on their choices and can act on them quickly.
But frankly, banks shouldn’t need a watchdog to tell them to do such things. Hiding behind complex fee structures that bear little relationship to cost is not fair. And of course you should be informed that you are about to be charged for an overdraft - things happen and you should have the opportunity to rectify them before you get stung.
Open API standards for banking will be a much more profound development than the fusty technical description might imply. APIs provide a means of making your own data available so that apps and aggregators can help you find the best deal. This will mean that you should be able to get direct access to a wide range of banking products from a favoured banking app, comparison site or dashboard that presents information to you in the way you want and works out the best deals based on that information. Therefore banks should not be able to get away with poor value products, because you’ll know that that’s what they are!
But there are some fundamental things the CMA report skates over or declines to address.
In tone it’s a recipe for incremental change amongst incumbent banks themselves and not for more radical reform of the sector. For example, the report does not see that having more banks helps develop competition. We agree that breaking up the existing banks is not the answer - banking needs new technology, new thinking, new standards; not expensively created clones. Inertia is not decisively broken by presenting customers with a Hobson’s choice of products from the same old banks doing the same old things. Innovation in business models will not be driven by those with an existing one to defend.
So what about Atom? It’s early days but we have begun our journey to offer customers a completely new type of bank. We intend that Atom is nimbler, more transparent and more efficient than the incumbents. It is bringing new technology to create a bank in your pocket, which aims to offer you not just exceptional convenience, but price competitiveness as well. We will embrace open APIs because we want our products and services to speak for themselves and, where we can’t compete, aim to help you find a provider that can.
And there are lots of innovators in financial services doing things like this. The CMA wants to encourage innovation but we would like to have seen recognition that the little newcomers may be the key to change and that all aspects of the playing field must be levelled to help them compete.
We would also have liked the CMA to have addressed obvious anomalies such as the requirement for small banks to hold much more capital than the large banks behind their lending – as much as seven times for mainstream mortgages (yes – really!). This may still come as that part of the review is ongoing – soon, we hope, as we strongly believe competition will open up as a result.
With further reform we can look forward, in the expectation that more will have been achieved than just a shuffling of the deck between the existing players.