Watchdog, the Competition and Markets Authority (CMA), yesterday announced plans to cap rip-off overdraft fees
Currently, nearly half of all current accounts go overdrawn, according to an investigation conducted by the Competition and Markets Authority (CMA), with UK banks raking in a staggering £1.2billion a year from those who exceed their agreed limits.
With family finances struggling, around half of current account customers use their overdrafts on a regular basis to make ends meet between paydays. But, its not just consumers with current accounts who are paying extortionate charges for going overdrawn or exceeding their pre-agreed overdraft limit. Small and medium size businesses are also a victim of rip-off fees.
This is why the CMA has announced a wide-ranging package of proposals yesterday, 17 May 2016, to tackle the issues head-on that are clearly hindering competition in personal current accounts (PCA) and in banking services for small and medium-sized enterprises (SMEs).
Some banks currently allow consumers to go into the red or over their agreed overdraft limit without incurring costs, however the amount you can go over can be as little as £5.00 without being penalised by a bank.
At present, it is hard for consumers and businesses to work out if they are getting good value, especially considering bank charges are complicated and opaque. Even in 2016, consumers and businesses still believe that it is difficult and risky to change banks, with business owners worrying about transferring pre-arranged lending facilities to a new bank or having lending facilities with another bank not associated to their bank account.
This is confirmed by the fact nearly 60% of personal customers have stayed with the same bank for over 10 years and over 90% of SMEs get their business loans from the bank where they have their current account. Due to this competitive pressures are weak, so banks do not need to work hard enough on price or quality of service to retain clients.
The CMA considered in its investigation whether the largest banks should be broken up but came to the view that this would not address the fundamental competition problems. However, having more banks would still not significantly improve the market or give customers a better deal, because of the current lack of transparency on fees and charges.
To transform the market the CMA believes banks instead need to be made to provide their customers with the right information so that they can easily find out which provider and type of account offers best value for them. The CMA proposes to push the development of new online comparison tools and improve the current account switch service (CASS) to make switching banks more straightforward and give customers more awareness of, and confidence in, the process.
FIIC accounts, which stands for ‘free if in credit’ are certainly not free for consumers who use an overdraft facility, which represent nearly half of personal customers. The CMA’s proposals include new measures targeted at overdrafts, with a particular focus on users of unarranged overdrafts; in 2014, £1.2 billion of banks’ revenues came from unarranged overdraft charges.
Big technological changes are happening in banking, and the CMA is also proposing to require banks to move swiftly to introduce an Open API (application programming interface) banking standard. This standard will enable personal and SME customers to safely and securely share their unique transaction history with other banks and trusted third parties.
The watchdog insists: “This will enable bank customers to click on an app, for instance, and get comparisons tailored to their individual circumstances, directing them to the bank account which offers them the best deal.” However, the sharing of highly sensitive information is likely to lead to concerns about from consumers and privacy organisations on data protection, and who do we trust to keep this sensitive data safe.
The CMA also proposes that banks should be made to regularly prompt their customers to check that they are getting good value from their banking provider. When these prompts direct customers to digital comparison services which give tailored price-comparison and service quality advice, the foundation has been laid for a major change in the retail banking sector.
On these foundations, the CMA proposes to build a strong package of measures to deliver better banking services to SMEs. Making it easier for SMEs to shop around and open a new current account will reduce business owners’ reliance on their personal bank when choosing a bank for their business. By making the prices and availability of lending products more transparent, the majority of SMEs need not, as is the case now, turn directly to their existing bank for finance without considering other offers.
The package of changes, including capping overdraft fees, could bring benefits to bank customers to the tune of £1 billion over 5 years. Already, if personal customers switched to a cheaper product for them, annual savings could be on average £116; ranging from £89 on average for customers who do not use an overdraft, to £153 on average for overdraft users.
Alasdair Smith, Chair of the Retail Banking Investigation, said: “For too long, banks have been able to sit back and not work hard enough for their personal and small business customers.
“We believe the strong and innovative package of measures we are proposing will give customers the information and tools they really need to get a better deal out of the banks. They will also protect those who fall into overdraft from being stung with unexpected fees.
Smith continued: “New entrants into a market are an important source of competition and innovation, and we are well aware of the current barriers to challenger banks in UK retail banking. What’s really holding them back is their ability to highlight to customers how new offerings compare with their current deal.
“Our package of banking reforms will help new competitors get a stronger foothold in a market which is of vital importance to the whole economy.”
Chris Hargreaves, founder of AngryPolicyholders.com, said on the news of the CMA findings: “Bank for far to long have had little competition on the high street as they don’t need to actively attract new customers.
“The fact that the majority of consumers and businesses stay with their current bank, rather than regularly assess their needs and the deals available, further confirms that banks retain a significant number of clients without the need to offer superior service or products.
Chris continued: “You only have to look at insurance banks sell. It is normally significantly more expensive, compared with specialist insurers or through brokers, and in most cases an inferior product. Why can a bank sell inferior products or services, without providing excellent customer service and still get repeat custom and long-term loyalty?
“The answer is that banks have a captive market, where we have to go to them on a regular basis, which in turn gives them the opportunity to flog us inferior products or rip us off with overdraft fees, because at the end of the day where else are we going to go?”