“CMA Sticks to its Guns”
The Competition and Markets Authority (CMA) has published its final report on the UK retail banking sector. The government initiative has concluded that highstreet banks do not compete enough for customers’ business. Simultaneously, challenger banks find it difficult to compete and grow. Of course the loser in all of this are consumers. Traditional banks operate in an oligopolistic type environment: high fees and poor service. CMA wants to change all that.
To tackle these “shortcomings”, the CMA will be implementing a “wide-reaching package of reforms” to ensure customers benefit from new technology and smaller firms do not encounter unnecessary hurdles to offering competing services. These “key measures” include;
- Requiring banks to implement Open Banking by early 2018, to accelerate technological change in the UK retail banking sector. Open Banking will enable personal customers and small businesses to share their data securely with other banks and with third parties, enabling them to manage their accounts with multiple providers through a single digital ‘app’, to take more control of their funds (for example to avoid overdraft charges and manage cashflow) and to compare products on the basis of their own requirements.
- Requiring banks to publish trustworthy and objective information on quality of service on their websites and in branches, so that customers can see how their own bank shapes up. Whether a personal customer or small business is willing to recommend their bank to friends, family and colleagues will be a core measure but we will also be requiring banks to publish and make available through Open Banking a range of other quality measures.
- Requiring banks to send out suitable periodic and event-based ‘prompts’ such as on the closure of a local branch or an increase in charges, to remind their customers to review whether they are getting the best value and switch banks if not. Unlike many other financial products such as home insurance, current accounts do not have annual renewal dates to act as natural reminders and other possible triggers like business growth are not prompting customers to review what they are getting from their bank.
Simultaneously, the CMA wants to make it easier for consumers to switch. This is in recognition that once a consumer is engaged with a bank they are loathe to move to another due to institutional friction and cost.
The CMA also introduced changes for consumer over-drafts – a segment of retail banking that drives £1.2 billion in revenue for banks – each year.
Alisdair Smith, Chair of the banking investigation said;
“The reforms we have announced today will shake up retail banking for years to come, and ensure that both personal customers and small businesses get a better deal from their banks.”
Smith qualified the upheaval as “breaking down barriers” and increasing innovation and competition – a key them for the UK government.
“Our central reform is the Open Banking programme to harness the technological changes which we have seen transform other markets,” stated Smith. “We want customers to be able to access new and innovative apps which will tailor services, information and advice to their individual needs.”
Louise Beaumont, of GLI Finance, sat on the CMA taskforce; commenting on the report Beaumont labeled the announcement a “coming of age for Fintech.”
“The Open Bank Working Group was set up in 2015 to develop a roadmap for how technology and innovation could reshape the banking sector. Having sat on that taskforce, I’m delighted to see our recommendations being taken so seriously by the CMA and our hope is that they will continue to exert pressure on traditional banks to harness the power of technology to provide SMEs with quicker and broader access to the range of financial products they need to help fuel growth. Make no mistake, this report marks the coming of age of FinTech and we must ensure that all stakeholders embrace the potential benefits this can deliver to customers.”
Isabelle Jenkins of PwC’s banking group lauded the CMA stating the group had “stuck to its guns.”
“The CMA has stuck to its guns and kept its remedies materially unchanged from the provisional measures it consulted on earlier this year. This is despite calls from challenger banks urging the CMA to take more radical action on capital requirements. While challenger banks are likely to be disappointed with today’s report as the CMA confirmed it will not carry out further analysis on this issue, they could yet see a more significant shake up from the PRA, Bank of England and the Treasury . The CMA’s proposal for an open Application Programme Interface (API) standard, which would give consumers access to more information from banks, is at the heart of its package of remedies. FinTech firms are potentially one of the winners here, but the ambitious timescale for the project means implementing it, and the CMA’s other measures, could be challenging and costly for banks. This package of measures will go some way towards addressing customer apathy towards bank account switching. But there needs to be a more even playing field between established banks, challengers and FinTech firms for the full benefits to be passed on to consumers.”
Jenkins echoed Beaumont’s analysis that the report has “significant consequences for the alternative finance sector as a whole”
“these measures will help raise awareness of niche providers who are able to offer the right types of specialist product, quickly and at an appropriate price to the SME.”
Jenkins labeled the policy initiative as helping the UK economy in the post-Brexit world;
“Our hope is that through effective implementation these various measures will combine to not only deliver significantly better outcomes for customers but also help play a role in injecting genuine competition to deliver much needed economic growth as UK plc adjusts to a post-Brexit environment.”
The UK is unique in its policy of emphasizing a competition mandate. The approach helps to guarantee consumers get better services at a lower cost while compelling older, established firms to provide better service.
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