There is one big problem with banks — the customers

Activists march in a demonstration organized by the Blockupy movement to protest against the policies of the European Central Bank (ECB) after the ECB officially inaugurated its new headquarters earlier in the day on March 18, 2015 in Frankfurt, Germany.
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Britain’s Competition and Markets Authority (CMA) published the first draft of findings from its “in-depth investigation into the £16 billion ($24.7 billion) current account and business banking sectors” on Thursday.

The review found that, as expected, there’s not enough competition in the UK banking sector. But, perhaps surprisingly, the issue isn’t monopolistic banks throwing up walls to stop customers leaving – it’s lazy account holders.

Despite challenger banks like Aldermore and Metro Bank springing up to offer alternatives and new services that make switching easier, consumers just aren’t interested.

As a result, banks aren’t working hard enough for their customers. But can you blame them? The evidence suggests they’d be wasting their money if they did.

Here’s a killer line from the report: “Despite [some] encouraging developments, because too few customers are switching, banks do not have strong enough incentives to work hard to compete for customers through better products or cheaper prices, and smaller or better banks find it hard to gain a foothold.”

It’s not as if customers don’t have an incentive to switch either. The report found heavy overdraft users could save up to £260 ($402) a year if they switched banks, while current account users in general could save an average of £70 ($108) a year.

But costs like these aren’t immediately clear to customers. The problem is compounded by the fact that most consumers see switching as a hassle, despite new services like Midata and CASS designed to take the pain out of the process.

Here’s the CMA again: “The investigation also discovered that accounts which are more expensive and below average quality are not losing customers to cheaper and better alternatives at the rate that would be expected in a well-functioning market.”

As a result of all this, the CMA’s report doesn’t recommend support for challenger banks or punishments for the big banks. Instead, it recommends more education for the consumer.

The CMA suggests:

    Mandated “prompts” from banks to customers, telling them to shop around when certain trigger points are breached, such as unplanned overdraft charges or local branches closing. Upgrading Midata, an industry online tool, launched with the support of Government, that gives consumers access to their banking history online. Requiring the creation of a new price comparison website for SME bank accounts. Requiring banks to help raise public awareness of, and confidence in, switching bank accounts, through increasing funding for a widespread and sustained advertising campaign promoting CASS. Requiring better sharing of information with credit reference agencies, banks, and financial advisors to make it easier for SMEs to shop around.

The CMA says: “The problems in the market are unlikely to be resolved by creating more, smaller banks; it is the underlying issue of lack of switching which has to be addressed.”

Good for banks, bad for challengers

All of this is relatively good news for the UK’s “Big Four” banks and bad news for challenger banks. The findings essentially show that challenger banks are a niche concern and their rhetoric about challenging the incumbents isn’t turning into reality.

I had this conversation a few weeks ago with John Harvie, a director at global consultancy firm Protiviti who specialises in retail banking.

Harvie made the point that while it’s great in theory to have a proliferation of banking alternatives springing up – Metro Bank, Mondo, Atom Bank, etc. – in practice they’re diluting their power and therefore ability to compete against the established players.

That’s because they’re all fishing for customers from the same pool of early adopters who are willing to try new products and services. But that pool isn’t getting any bigger and the more banks that spring up, the smaller share each will get.

Challenger banks will find it hard to grow without big budget marketing campaign’s like Santander’s.

Remember what the CMA said: “Because too few customers are switching… smaller or better banks find it hard to gain a foothold.”

The only way any players will likely be able to break out of this band and gain any meaningful scale is through massive amounts of marketing and promotional activity.

Santander, which was effectively created through mergers in 2010, has done this through a high-profile TV ad campaign for its 123 current account with sports stars like Rory McIlroy and Jessica Ennis.

But Santander has the benefit of a Spanish parent company with very deep pockets. Other challenger banks don’t have this luxury.

The CMA’s full provisional report will be published next week and the final report with recommendations is due next May.