Free in-credit banking under threat in the UK

Don't end free in-credit banking

At least in terms of perception, the UK banking sector is in flux. There are new banks, new regulators, new suppliers, new business models and new scandals. Now, we can add a new ‘joined up’ and ‘in depth’ investigation by the Competition and Markets Authority (CMA) into personal current accounts and small business banking, again including current accounts and small business loans.


However, one thing that is changing slowly is the low turnover of current account customers at about three per cent a year – despite all the noise, and despite the regulatory prods that have already been administered. This week the UK Payments Council announced a 16 per cent year-on-year increase in the number of current account switches, on the back of the new current account switching guarantee, but the overall figure for 2014 looks like being about the same as 2012, with a drop in 2013.

So the hype has run ahead of the reality. As the CMA pointed out, the market share of the large banks has remained stable, with the big four banks controlling 77 per cent of personal current accounts and 85 per cent of SME bank accounts. The CMA seems to be using this point to support the need for an investigation and for change.

Other than this, the CMA (linked to here) does not exactly lay out the enormous injustices which a new investigation is desperately needed to correct. It points to the fact that barriers to entry still remain. It points to limited transparency and the difficulty of comparing the charging models of different banks. It says that most consumers regard most current account offerings as more or less the same, and finally it adds that free in-credit banking may ‘distort’ the market.

Do these points really add up to an unanswerable case for yet more enforced reform?

No. And the turnover figures don't suggest demand for it either.

IBS has been writing extensively about challengers entering the UK market in the last five years or so. First there was a trickle but now the pace has increased, with more current account offerings even in the last few months from the likes Marks & Spencer and Tesco, others offering variations on current accounts such as Thinkmoney, and plenty more to come. And the barriers to entry have certainly lowered. Regulators are requiring less capital and granting licences much faster. Entrants will be guaranteed access to the faster payments system. And more suppliers are offering solutions, such as Fiserv with its Agiliti SaaS platform.

Beyond this, generally speaking, entrants to the banking market face only the types of hurdles you would expect in any market: brand awareness, lack of economies of scale, and customer inertia. If new entrants want to succeed, they will have to provide something better or cheaper than existing banks can.

Don't end free in-credit banking

This will be tough, but why should it be anything else? The regulators should give the current wave of new entrants a chance before deciding more needs to be done. Some industry players have lamented that more players does not necessarily mean more choice and competition, but new and existing players will always have the opportunity to innovate and it’s a certainty that if they think of something, they will do. If they can convince customers to move, they will do.

This leads to the point about free in-credit banking, and here the CMA should be careful what it wishes for. It suggests that different groups of customers are subsidising each other’s banking. This is obviously true, but not necessarily worth dismantling. It’s not unique to banking either. People who don’t crash their cars help keep the insurance of bad drivers affordable. And healthy people pay for the healthcare of the rest. The difference in this case is that the spur is to act sensibly, not recklessly.

In the case of banking, every customer starts with a blank sheet of paper and all have the chance to avoid paying fees by paying attention, managing their money properly, taking advantage of what banks offer in terms of free overdrafts and so on. People also learn – in my case, paying charges when I was a student subsidised free banking when I grew up. It’s not perfect and it doesn’t protect everyone, but it seems like a fine incentive built into the current model.

What is clear, judging by the tone of reporting and the fact that banks have been trying to move customers towards packaged accounts for years, is that the banks would love it if they were forced to move away from free in-credit banking. They would have done already if they could get away with it. That it remains is a sign of competition working.

If, in the course of the investigation, you hear anyone from the CMA saying ‘if you like your free banking, you can keep your free banking’, don’t believe them.

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