Lack of competition amongst major banks due to free banking

Posted by Rebecca Stains in Banking on 26 May 2015 - Rebecca worked as a Credit Analyst at checkmyfile until 2015

An official investigation has identified a lack of competition among major banks due to free banking, which could mean that customers are not getting the best deal. The Competition and Markets Authority (CMA) is looking at the 'free-if-in-credit' model as part of its investigation into current accounts.

A spokesman confirmed that there is a potential for the CMA to conclude that free banking does in fact reduce competition. The publishing of these provisional findings is scheduled for January next year. The CMA has been able to look at internal documents from the major banks (Lloyds Banking Group, HSBC, RBS, Barclays and Santander).

Free-if-in-credit accounts are not truly free. Customers are charged interest when they go into their overdraft, and even higher fees for then going over their overdraft limit. Even those who stay in the black may be paying, as banks can profit from the cash that is held there.

The CMA’s update revealed that paying customers no interest is a huge money-spinner for banks and despite decreases, remains their biggest source of revenue from current accounts. CMA analysis showed net revenue among banks fell between 2011 and 2014 as banks continue to struggle to raise money in other areas.

The CMA decided to carry out an investigation into current accounts on the basis that levels of switching appeared low, even though customers were getting a bad deal from their existing provider. The investigation proves current accounts are profitable in their own right.

The findings from the CMA investigation proved customers loyalty to their existing banks. The agency has reported that 37% of those it surveyed had been with their bank or building society for 20 years. 73% of customers have not shopped around in the last three years. Despite the introduction of the seven day standard switching process only 3% actually of consumers switched last year.

Paul Pester, chief executive of TSB Bank, said, “The UK banking market isn’t working properly for the real benefit of UK consumers, which is why the CMA investigation is so important. Creating a more dynamic switching market, addressing the scale advantages of the big banks and tackling barriers to entry can help consumers get a better deal and ultimately rebuild trust in the industry. The big banks have had a stranglehold on the market for too long and greater competition will help deliver positive change to the culture and attitudes we all know need to change in UK banking”.

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