Phil Brooks, Financial Services Research Director at Harris Interactive

When some of the UK banks aggressively raised their unauthorised overdraft charges by approximately 50% back in 2005 (i), who could have known where it would lead? Although the banks won their case in the Supreme Court, the ruling still left open a number of questions around the transparency of charges and fees, (‘free banking’) as well as switching.

Since then, the UK has suffered the financial crisis and endured an Independent Commission on banking, whose recommendations included a 7-day switching service and greater transparency of fees and charges.

So when we have a more straightforward switching process and tell people once a year how much their bank account has cost them, alongside increased competition – the market will resolve itself, right?

Our own Harris Poll (ii) shows that just 6% either opened a bank account for the first time or switched their account in the last 12 months and just 11% of all account holders say they are likely to switch in the next 12 months. This is off the back of the high profile RBS and NatWest service failures, and new scandals such as LIBOR and money laundering.

The recent decision by the OFT to ‘Wait and see’ rather that investigate the market for lack of competition may be a ‘measured response’, but it also feels like a ‘missed opportunity’. Some may make comparisons with similar events within the telecoms and energy sectors. However, the key difference between those sectors and retail banking is that with the help of comparison sites costs were much more transparent – will the same be the case with retail banking? Will consumers truly be able to make an informed choice?

The threat of challengers and new entrants
Although Metro, M&S and now the Post Office have entered the market, the last three years have been a bit of a hiatus with the fiasco of the ‘branch sell offs’ and the long awaited arrival of both Tesco and Branson.

It is clear that consumers are also waiting for change. Alongside Nationwide and the Co-operative, our research indicates that Virgin Money will be very strong indeed and Tesco will hold their own, particularly when you consider neither has a product to switch to yet! Initial reactions to the Post Office are also supportive with 14% of all account holders (iii) saying they would consider them.

One thing all of their success indicates is that a swelling number of consumers are looking for something different. So what does ‘different’ look like?

It is fair to say there is little difference between the majority of bank accounts on offer. Some may argue for the Santander 123 account and clearly it does appear to have had some impact, but ultimately the key differences come down to perceptions of both service and brand. It is on both these counts that the challengers and new entrants will continue to threaten the establishment.

We all know the industry has an image problem, but ultimately it is up to each organisation to demonstrate how they are different and what is unique about them. Consumers today want to deal with financial services organisations that act responsibly, treat customers fairly, are trustworthy, provide excellent service and demonstrate that they really care about customers. Being ethical, relevant to you personally and a good fit clearly also has its benefits.

Developing the framework of an appealing proposition is the easy part, but actually motivating people to switch and change behaviour is much more difficult.

Encouraging switching and greater engagement
Consumers today have a greater opportunity to engage with their finances more than ever before, the growth in online banking and now mobile is certainly testament to that. However, do consumers really take the time to fully evaluate their banking needs or do consumers simply accept the service levels and benefits they get from their bank without ever challenging or comparing them?

Given how historically low switching has been within the market (just half of us have ever switched), I think there is certainly a strong argument for apathy and the old adage that people don’t value what they don’t pay for. So how can we get more customers more engaged with their account and potentially encourage more to switch?

Free banking is a “dangerous myth”
When Andrew Bailey, then executive director of the Bank of England, described ‘free banking’ (free if in credit) as “a dangerous myth” (iv) it certainly set the cat amongst the pigeons. Whilst his terminology may have alarmed some, I do believe if we really wanted to encourage greater levels of engagement and increased levels of competition then ending ‘free banking’ could prove to be the true ‘disruption’ the sector needs.

As indicated in our Harris Poll (v), the ‘free banking’ system stifles competition and arguably innovation. If every bank charged for a bank account, 38% of all account holders agree they would be more likely to switch with a further 25% somewhat agreeing.

The biggest benefit of removing ‘free banking’ is not the increased levels of ‘claimed’ switching, it is the fact that almost two-thirds agree that they would pay more attention to service levels and benefits they received from their bank, with a further 25% somewhat agreeing.

Imagine what could be done if people actually had a bank account tailored to their needs and that fitted in with their lifestyle. Imagine the additional support, at both ends of the market, that could be provided.

Design new products and services
The current system clearly disadvantages those on low incomes and those who struggle to manage their finances. Whilst it may sound strange to say charging would be a fairer system, it would at least mean that more products and services would be designed around different customer segment needs and concerns rather than the range that we have today.
The criticism the Post Office has faced in the last week for charging for their Basic Bank Account has been grossly unfair. Charging just £5 per month for an account that has no charges for unpaid items should be seen as a bold move and offers reassurance to those most at need. However, getting people to switch into it will be extremely difficult.

A step too far
Admittedly, removing ‘free banking’ would cause uproar and politically it is probably too hot for the regulator to handle. Just look at some of the comments made on a report written by Phillip Inman of the Guardian.

Therefore we need to find other ways to improve the transparency of fees and charges. Just laying out what a bank account has cost once a year in my mind does not go far enough.

We must continuously strive to improve the knowledge and understanding of customers, so why only communicate their total costs and fees once a year? Why not quarterly or monthly, i.e. as a reminder why not state the ‘average’ monthly cost over the last 12 months alongside the total cost?

In the same statement, marketing messages can be developed that recommend more suitable accounts based on an individual’s banking habits. At least this way we are providing people with the best information and hopefully educating them to make an informed choice rather than continuing to trade on their lack of understanding.

i._ http://www.thisismoney.co.uk/money/saving/article-1630455/A-timeline-of-the-bank-charges-fight.html
_ii. Harris Interactive Survey amongst 1,662 bank account holders 4th December to 13th December 2012
iii_. Harris Interactive Survey amongst 1,662 bank 474 account holders 23rd April to 25th April 2013
iv._ http://www.bbc.co.uk/news/business-18186363
v._ Harris Interactive Survey amongst 1,662 bank account holders 4th December to 13th December 2012

Phil Brooks is a senior market research director at Harris Interactive and specialises in financial services research. Working across the sector, Phil focuses on programmes that include customer satisfaction, brand audits and product/service developments in the B2B and B2C markets.