Shaking up banking competition?

15 August 2016

The Competition & Markets Authority’s (CMA) retail banking market investigation final report had a mixed reception this week. Many commentators argue the CMA has not done enough to shake up the big four banks’ dominance of the market. And reading some of the press coverage, you’d be forgiven for thinking the largest banks have been let off easily. But, is this the case if you look a little deeper?

Challenger banks campaigned for the CMA to take more radical action on capital requirements and funding costs, which they argue are the greatest barriers to growth. They are disappointed by the CMA’s decision not to look at these issues further; the CMA argues this is a matter for the PRA, Bank of England and the Treasury, who are considering the challengers’ concerns and recommendations.

While I agree the CMA could and should have done more to increase competition in the interests of consumers and SMEs, the review will still impact the biggest banks.

A closer look at the report reveals the CMA’s measures will have a significant effect on banks’ systems, business models and strategies. For instance, measures to introduce alerts and a monthly maximum charge for unarranged overdrafts will likely increase financial awareness among consumers, and add more pressure on bank revenues in an already challenging economic environment. This is brought into focus by the review’s finding that customers paid a total of £2.9bn in overdraft fees and charges in 2014 (£1.2bn of which comes from unarranged overdraft fees). Banks will need to analyse the likely impact of the CMA’s overdraft remedies on customer behaviour, and any resulting effect on revenue. If overdraft customers are no longer profitable for banks, they will need to reconsider their business model – perhaps even looking at introducing fees for current accounts, something that has been widely discussed but not yet implemented.

The CMA’s requirement for information to be shared on service quality could also prompt banks to improve their culture. This measure has clear benefits to customers - empowering them to take decisions on which current account products offer the best value and are most suitable for their needs.

The CMA’s view is that the best way to improve competition is through encouraging shopping around and better engaged consumers, rather than more radical measures such as breaking up the banks. Its vision largely rests on a proposal for an open Application Programme Interface (API) standard, which would allow consumers to access information from different banks via a single interface or app. This initiative gives the UK banking industry a chance to show it’s a global leader in banking innovation, and may make the UK more attractive to new entrants with digital offerings. But the ambitious timescale (the CMA has set deadlines of March 2017 and early 2018) may be challenging for more traditional banks, given the complexity of their IT infrastructure. This solution is also unlikely to help the most vulnerable of customers, who may not own or be comfortable using smartphones and are less likely to be engaged enough to switch.

And this idea is not new. Similar requirements are due to come into force at the beginning of 2018, when EU Member States are due to adopt the Second Payment Services Directive (PSD2). This directive requires firms to provide access to their customers’ accounts to third party providers via APIs. It will allow a third party to initiate a payment on behalf of a consumer using their existing bank account – creating opportunities for incumbents and FinTech firms to develop new customer-centric offerings, and potentially changing the way consumers interact with their bank.

So the CMA’s flagship remedy brings forward an initiative banks would have to carry out anyway. And encouraging consumers to shop around can only do so much to improve competition. Still, by suggesting the creation of an open API standard for banking, the CMA is making an exciting step towards a revolution in mobile banking with the same services available on smartphones as can be found in high street branches. What remains to be seen now is whether the PRA, Bank of England and Treasury will look more deeply into challenger banks' concerns over capital and funding. 


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