SMF COMPETITION REPORT: BANK CUSTOMERS GETTING A BETTER DEAL AS THE BENEFIT OF SWITCHING HAS DOUBLED IN A DECADE

• In 2006, an average consumer could have saved £56 by switching current account, this figure has now more than doubled to £116
• Report finds 17% fall in bank revenue over past eight years – a sign of increased competition
• However, new low interest environment may advantage larger banks and undo recent competition gains

Consumers are getting better value for money from their current account and benefitting from a more competitive market according to a new report from the Social Market Foundation (SMF) published today.

The report, A Switch in Time: The evolution of Britain’s personal current account market, supported by Bacs Payment Schemes Limited (Bacs), has found a 17% fall in bank revenue from personal current accounts over the past eight years – a sign of increased competition in the personal banking market.

Most consumers are now paying less for their accounts and receiving more back from their banks through higher interest rates and other bonuses such as cashback on purchases.

The savings available through switching have also increased for consumers. Whereas in 2006 the average consumer could have saved £56 a year by switching to the best value account, this figure has more than doubled to £116 in 2016.

However, the report warns that falling revenues combined with increases in the amounts paid out to consumers through higher interest rates and other rewards could have a negative impact on competition and market share. With interest rates set to stay low for a sustained period, there is a risk that only the larger existing banks can afford to offer competitive rates and rewards.

The report identifies six measures of competition and examines how they have changed since 2000. Despite the conclusions of the Competition and Markets Authority (CMA) – that banks do not feel enough pressure to compete on price or quality – the research shows clear positive developments for consumers in the following areas:

1. Improved value for money: SMF calculations show that revenue from the average active personal current account has fallen by 17% over the past eight years. Evidence also shows that the proportion of banks’ income derived from personal current accounts dropped from 33% in 2006 to 22% in 2011. Interest paid to consumers has risen from 4% of net revenues in 2011 to 10% in 2014, more than doubling the amount of interest earned by the average consumer.
2. Increased product innovation and differentiation: There has been a decline in ‘Free If In Credit’ current accounts, with their share falling by at least 13% since 2006. This has coincided with a big rise in ‘reward’ accounts, which now constitute more than a third of new openings (34% in 2015).
3. Lower market concentration: The proportion of active current accounts held by the ‘Big 4’ banking groups is at its lowest level in over a decade – at just over 60%.
4. More new entrants and new entrants gaining scale: The mid-sized competitors – Santander and Nationwide – have almost doubled their market share since 2006; and there are many new entrants, ranging from branch-based retail banks to online-only entrants.

The report also identifies mixed progress in the following measures of competition:

5. Better customer service: Despite service innovation through the use of technology and changes in branches, the CMA finds that a substantial proportion of customers are paying above-average prices for below-average service quality. One area where service could be deemed poor is overdraft charges. Overdraft users continue to bear a disproportionate volume of the costs of providing personal current account services, and many consumers remain unaware or confused about how overdraft charges work.
6. Higher levels of searching and switching: Despite 75% of consumers being aware of the Current Account Switch Service (CASS) and an increase in the savings associated with switching, many remain inert and do not actively search for information about other current accounts or go ahead and switch.

The research also identifies some outstanding issues following the final report of the CMA’s banking inquiry which will be important to future competition in this market, including:

• The current low interest rate environment may advantage larger banks who can afford to continue to drive consumer demand for reward accounts that pay higher rates of interest.
• Market share may not be the best measure of competition taken on its own but is used by many observers. There is no guarantee that the CMA proposals of themselves will make a significant difference to the market share of the larger banks though it is likely that they will improve competition on the other measures discussed in this paper.
• More information, available through Open Banking, must facilitate better targeting of product innovation and differentiation to customers. Improving awareness of and confidence in CASS may also need to be targeted through working with specific groups of customers, such as overdraft users, the young and financially disadvantaged.

EmranMian, report author and Director of the SMF, said:

 “The CMA report includes a wide ranging set of remedies for improving the current account market but it doesn’t indicate what good competition looks like. In this report we take 6 measures of competition and show the progress made since 2000. We find that product innovation has increased, bank revenues per current account are down 17%, and awareness of the switching service is rising, as are the saving to be made by switching. Future measures like these will be the way to judge whether the CMA’s recommendations are working and whether consumers are truly benefiting from competitive personal banking.”

 Anne Pieckielon, Director of Product & Strategy at Bacs, commented:

 “We are proud that the Current Account Switch Service has played such an important role in delivering a more competitive current account market. The UK now boasts a world-leading switch service and is an example of the new breed of initiatives that place control in the hands of consumers. The balance of power has shifted and by offering people a simple and stress-free way to switch their current account, it has driven banks to offer new products, more favourable rates and generally work harder than ever before to attract and retain customers.

 “The SMF report shows that competition has increased and consumers are getting better value from their current accounts. This is precisely why the Current Account Switch Service was set up and we look forward to continuing to play a key part in the delivery of a more competitive market.”

• In 2006, an average consumer could have saved £56 by switching current account, this figure has now more than doubled to £116
• Report finds 17% fall in bank revenue over past eight years – a sign of increased competition
• However, new low interest environment may advantage larger banks and undo recent competition gains

Consumers are getting better value for money from their current account and benefitting from a more competitive market according to a new report from the Social Market Foundation (SMF) published today.

The report, A Switch in Time: The evolution of Britain’s personal current account market, supported by Bacs Payment Schemes Limited (Bacs), has found a 17% fall in bank revenue from personal current accounts over the past eight years – a sign of increased competition in the personal banking market.

Most consumers are now paying less for their accounts and receiving more back from their banks through higher interest rates and other bonuses such as cashback on purchases.

The savings available through switching have also increased for consumers. Whereas in 2006 the average consumer could have saved £56 a year by switching to the best value account, this figure has more than doubled to £116 in 2016.

However, the report warns that falling revenues combined with increases in the amounts paid out to consumers through higher interest rates and other rewards could have a negative impact on competition and market share. With interest rates set to stay low for a sustained period, there is a risk that only the larger existing banks can afford to offer competitive rates and rewards.

The report identifies six measures of competition and examines how they have changed since 2000. Despite the conclusions of the Competition and Markets Authority (CMA) – that banks do not feel enough pressure to compete on price or quality – the research shows clear positive developments for consumers in the following areas:

1. Improved value for money: SMF calculations show that revenue from the average active personal current account has fallen by 17% over the past eight years. Evidence also shows that the proportion of banks’ income derived from personal current accounts dropped from 33% in 2006 to 22% in 2011. Interest paid to consumers has risen from 4% of net revenues in 2011 to 10% in 2014, more than doubling the amount of interest earned by the average consumer.
2. Increased product innovation and differentiation: There has been a decline in ‘Free If In Credit’ current accounts, with their share falling by at least 13% since 2006. This has coincided with a big rise in ‘reward’ accounts, which now constitute more than a third of new openings (34% in 2015).
3. Lower market concentration: The proportion of active current accounts held by the ‘Big 4’ banking groups is at its lowest level in over a decade – at just over 60%.
4. More new entrants and new entrants gaining scale: The mid-sized competitors – Santander and Nationwide – have almost doubled their market share since 2006; and there are many new entrants, ranging from branch-based retail banks to online-only entrants.

The report also identifies mixed progress in the following measures of competition:

5. Better customer service: Despite service innovation through the use of technology and changes in branches, the CMA finds that a substantial proportion of customers are paying above-average prices for below-average service quality. One area where service could be deemed poor is overdraft charges. Overdraft users continue to bear a disproportionate volume of the costs of providing personal current account services, and many consumers remain unaware or confused about how overdraft charges work.
6. Higher levels of searching and switching: Despite 75% of consumers being aware of the Current Account Switch Service (CASS) and an increase in the savings associated with switching, many remain inert and do not actively search for information about other current accounts or go ahead and switch.

The research also identifies some outstanding issues following the final report of the CMA’s banking inquiry which will be important to future competition in this market, including:

• The current low interest rate environment may advantage larger banks who can afford to continue to drive consumer demand for reward accounts that pay higher rates of interest.
• Market share may not be the best measure of competition taken on its own but is used by many observers. There is no guarantee that the CMA proposals of themselves will make a significant difference to the market share of the larger banks though it is likely that they will improve competition on the other measures discussed in this paper.
• More information, available through Open Banking, must facilitate better targeting of product innovation and differentiation to customers. Improving awareness of and confidence in CASS may also need to be targeted through working with specific groups of customers, such as overdraft users, the young and financially disadvantaged.

EmranMian, report author and Director of the SMF, said:

 “The CMA report includes a wide ranging set of remedies for improving the current account market but it doesn’t indicate what good competition looks like. In this report we take 6 measures of competition and show the progress made since 2000. We find that product innovation has increased, bank revenues per current account are down 17%, and awareness of the switching service is rising, as are the saving to be made by switching. Future measures like these will be the way to judge whether the CMA’s recommendations are working and whether consumers are truly benefiting from competitive personal banking.”

 Anne Pieckielon, Director of Product & Strategy at Bacs, commented:

 “We are proud that the Current Account Switch Service has played such an important role in delivering a more competitive current account market. The UK now boasts a world-leading switch service and is an example of the new breed of initiatives that place control in the hands of consumers. The balance of power has shifted and by offering people a simple and stress-free way to switch their current account, it has driven banks to offer new products, more favourable rates and generally work harder than ever before to attract and retain customers.

 “The SMF report shows that competition has increased and consumers are getting better value from their current accounts. This is precisely why the Current Account Switch Service was set up and we look forward to continuing to play a key part in the delivery of a more competitive market.”