3 The current account market and switching
62. As we discussed previously, some segments of
the market appear to be more concentrated than others. The current
account market appears to be the most concentrated, and concentration
has increased significantly. Lord Turner considered the importance
of the personal current account market derives in large part from
its perceived role as a gateway productthat is, as an avenue
through which consumers access, and firms sell, other potentially
more profitable financial products. He described the personal
current account as "essentially a loss leader, [...] a classic
loss leader, or at least a low return leader", which banks
provide in order to get hold of a relationship on which they can
then sell other products." He argued this acted as a catalyst
for "aggressive selling" because providers were "trying
to make up for the low profitability of the core product."
63. In its recent market study Barriers to entry,
expansion and exit the OFT concluded that "the PCA continues
to remain an important gateway product in retail banking",
although their research showed that cross-selling rates varied
considerably with respect to different retail financial products
(see Table 8 below).
Jayne-Anne Gadhia, CEO of Virgin Money, concurred with the OFT's
conclusions stating that "the reason that banks want to attract
current account customersand big banks do[...] and
want to talk about free banking is because a lot of profitability
comes off the analysis that is subsequently undertaken to enable
big banks to sell different products to customers".
As Benny Higgins said:
What the current account acts as a fulcrum for
all of the other products that banks sell. So for example, 88%
of savings products will be sold by the bank that has the current
Table 8: Current account cross-selling conversion
rates, by product type, Sept 2009
|Retail banking product
|Proportion of PCA customers who hold this product with their PCA provider (%)
|Unsecured personal loan
Source: OFT, Review of barriers to entry, expansion
and exit in retail banking (Table 7.1)
64. Many of the incumbent banks took a more nuanced
position on the extent to which the personal current account continued
to act as a gateway product. The two arguments they used were
that cross-selling rates had declined over time and that cross-selling
rates were low in the UK compared to other countries. Eric Daniels
told us "the cross-over between them [the different market
segments] is very, very small" adding that it would be "very
normal" for "a typical consumer" to "have
a mortgage with one bank, a credit card with yet another and a
current account with a third institution. That's very normal behaviour."
When quizzed on the discrepancy between the OFT's figures which
showed an 88% cross-selling rate on savings accounts and his earlier
answer that "cross-over is very, very small" Ms Weir
said that the OFT "numbers sound very high to me".
Mr Daniels also argued that international comparisons showed cross-selling
was far higher elsewhere"If we look at the comparisons,
if you look at Europe and other international comparisons, the
concentration of a customer's walletin other words the
number of products they buy from an individual institutionis
much higher in Europe than it is in the UK because customers shop
around for different banks, different products."
However, Brian Hartzer acknowledged cross-selling "was an
important part of what we are trying to do because in the end
[...] our strategy is to be a full service provider." Indeed,
Mr Hartzer's key regret was that RBS needed to get "better
at cross-selling". He explained that "at the moment
just under 40% of our customers only have one product with us,
and so we think that's a pretty big opportunity, and about one-third
of customers have two products with us."
65. We are concerned by the significant increase
in concentration in the personal current account market in particular
and the dominance of a handful of large banks. Despite the larger
banks' protestations, we consider the current account remains
a "gateway" product which means dominance in this market
by the large banks has competition implications elsewhere in the
sector. This means that barriers to competition in the personal
current account market need to be scrutinised particularly carefully.
66. The UK's 'free banking' model may be a significant
barrier to competition. The features of the 'free banking' model
are a free-in-credit charging structure, where regular fees for
operating the account are not charged but credit interest tends
to be low and explicit charges are levied for certain types of
transaction or service, which have been historically related to
1985 the transaction-based model, under which consumers were charged
per transaction or per block of transactions was predominant in
the UK. Free-if-in-credit banking was introduced by Midland Bank
in 1984. Its introduction led Midland to gain approximately 450,000
customers in the following year. As a result, other large current
account providers moved towards this model with the end result
that the free-if-in-credit personal current account model came
to dominant the market.
67. Recently some banks have introduced packaged
accounts in which customers pay a monthly fee for the package
which can include a mixture of banking services, insurance policies,
and unregulated services. The FSA estimated that over 14 million
customers hold such accounts and noted that such accounts "now
provide a significant source of fee income for banks."
Costs, revenues and profitability
of current account provision
68. One of the problems with the 'free banking' model
is that costs and profitability become extremely obscure, as does
the price paid by the consumer. We spent some time in our inquiry
trying to establish how much it costs to provide current account
banking services, what the customer 'paid' and how profitable
such services were.
69. In its 2008 market study on personal current
accounts in the UK the OFT estimated that the banks earned £8.3
billion in revenues from personal current accounts in 2006 and
that average bank revenue from a current account was £152
per customer per annum. The £8.3 billion came primarily from
the following sources:
- Net credit interest, defined
as the difference between the interest paid on credit balances
to consumers and the income derived from the bank from these funds
- Net authorised overdraft interest
- Net unauthorised overdraft
- Insufficient funds charges
- Packaged fees, and
- Ancillary sources.
John Fingleton told us that the OFT had not subsequently
updated the £8.3 billion figure.
Figure 1: Composition of industry PCA revenue
in millions, total 8.3 billion, 2006
Source: OFT, Personal current accounts in the
UK: An OFT market study, 2008, p 18,
70. The above chart shows the breakdown of revenues
from these six sources. As can be seen net credit interest alone
amounts to almost half the revenues earned by the banks from current
accounts. Helen Weir, Group Executive Director, Lloyds Banking
Group, told us that this 50:50 split held for Lloyds and that
"foregone credit interest would be approximately half of
the total income on personal current accounts". She went
on to explain that the total net credit interest figure for Lloyds
would be "approximate to our broad market share", which
would be around 25-30% of £4.1 billion or between £1-1.25
PROFITABILITY OF CURRENT ACCOUNTS
71. The OFT has previously tried to establish whether
current account provision is profitable on a stand-alone basis.
It concluded that banks typically assess profitability at the
wider retail banking level rather than for individual product
lines and that they had "judged that it would have been disproportionate
for the purposes of this market study [OFT's 2008 market study
on the personal current account market] to require the banks to
collect cost data at a product level purely in order to enable
us to assess profitability of accounts."
When John Fingleton was asked whether current accounts were profitable
on a stand-alone basis he explained that the banks did not attribute
their costs by product line, going on to tell us that consequently
it was not possible to make that assessment.
72. When questioned about the cost of current account
provision to the bank itself Helen Weir told us that:
The cost of a current account is quite significant,
as you'll appreciate [...] Typically the cost of the branch network,
the cost of providing ATMs, cheque facilities, the debit cards,
so there are a number of services that go along with the current
HSBC gave a similar answer, Joe Garner arguing that
it was "pretty much impossible to isolate the cost of providing
a current account to an individual customer". This was because:
The reason for that is that you would have to
make an assumption over how much of your branch network, your
ATM network, your purchasing system, your internet usage, et cetera
each customer used; all of those things you would have to factor
in to make an individual calculation. I don't think that either
it is really practical to do or very useful.
Mr Garner said that it was possible to produce an
average figure for the cost of products by taking "the total
cost of running a bank and dividing it by the number of customers
which gives you a number." However he warned that such a
figure would produce an average and would not "be representative
of a large number of customers"
In contrast, Co-operative Financial Services were more forthcoming
about the cost of current account provision, informing us that
"each individual current account customer [...] costs us
£85 per year" on average.
73. We asked bank executives whether the provision
of current accounts was profitable on a stand-alone basis. Helen
Weir told us that their "current accounts are profitable
but not excessively so" and that Lloyds were "getting
a hurdle benchmark rate of return on the capital that's employed
in that business".
Later she described overall current account provision as "not
Brian Hartzer described the overall RBS retail customer business
as "profitable", but explained that "profitability
tends to slosh around in a bank from one thing to another, depending
on where interest rates are and how people behave." He explained
At the moment, as interest rates have fallen,
what has happened is that the profitability of deposits has become
probably break-even at best and in some cases a loss, and the
margins on mortgages and some loan products are wider, so in a
sense are contributing to a larger portion of our profitability.
If rates rise that situation could very easily reverse [...] which
is that profit dynamics are constantly in flux.
74. Peter Vicary-Smith had little sympathy for banks
who complained about the limited profitability of operating current
accounts, telling us that in their position he would be "quite
happy to have personal current accounts as a loss leader"
given "the enormous amount of data they can use" and
"all the other things it enables me [the banks] to do."
COSTS TO CONSUMERS AND CLARITY OF
75. We also asked about the cost to consumers of
current account provision, including net interest foregone, which
is the increased return consumers could earn by placing their
current account deposits in, for example, higher interest savings
accounts. Ms Weir told us that for a typical customer with an
average current account balance of less than £1,000 the net
interest foregone would be £5 a year. When pressed on what
the cost of net interest foregone would be in a more typical year,
i.e. with base rate higher than 0.5%, she replied that a base
rate of 3.5% would imply net interest foregone of £35 per
annum. She went on
to compare the cost of a current account to consumers with the
price of coffee, telling us that:
The typical amount a customer pays for their
current account, including foregone interest, is approximately
the same as a cup of coffee a week
76. Ms Weir seemed confident that consumers would
know the cost to them of operating a current account, telling
us that "most consumers would have a pretty good idea of
what they are paying for their current [account] banking. However,
when we pressed her to say how much she paid in terms of interest
foregone herself, she was unable to answer.
Ms Weir was not the only witness who was unable to tell us the
cost of their current account. Lord Turner explained that he did
not know, although unlike Ms Weir he did not argue that most consumers
would know. Adam
Phillips was similarly unable to tell us how much he was paying
for his current account.
Benny Higgins stated "very few people" would be able
to quantify the cost of their current account and concluded that
the inability of most consumers to calculate such costs "strikes
at the heart of the issues around competition within current accounts."
77. The distinguished list of financial services
experts unable to tell us the cost to them of their current account
indicates a serious problem. If they cannot estimate the cost
of their accounts, we hold little hope that members of the public
are able to do so. Greater disclosure of information on cost is
a pre-condition to greater competition in this market.
WINNERS, LOSERS AND CROSS-SUBSIDY
UNDER THE FREE-IN-CREDIT MODEL
78. We also examined who were the winners and losers
from the free-in-credit banking model. Helen Weir considered that
for the "average" customer, current account provision
represented "good value":
the average customer paysand that's including
foregone interestless than a cup of coffee per week for
their banking. For that they get access with our group to over
3,000 branches, a wide ATM network, money transmission service,
use of debit card and so forth. If you compare that with things
like mobile, with Sky and a number of other things that's good
She revealed that approximately 30% of Lloyds customers
would pay fees associated with an overdraft whilst the remaining
70% of customers did not go into overdraft and had [positive]
credit balances in their account.
When Joe Garner, HSBC's Deputy Chief Executive in the UK, was
asked what proportion of HSBC customers ended up paying for their
current account, he told us that it was "a very difficult
question", but that "the vast majority pay additionally
no or very low overdraft charges" whilst "a small minority"
did pay more in overdraft charges and that these customers did
"need particular care and attention."
79. Adam Phillips was keen to expose the fact that
whilst free banking was "notionally free [...] it's not actually
free". He said the effect of this was "to favour certain
kinds of people against others."
John Fingleton explained that beneficiaries under the current
model were "people who have average balances that don't go
into overdraft and who manage their accounts very well. People
with average balances of less than the £1,000 a year are
far more likely to go into overdraft. As that number comes down,
you get numbers that go into overdraft, say, six times a year.
If you go into overdraft six times a year, the chances are you
are paying way above the average cost of a bank account."
Mr Fingleton described the model as "truly a cross-subsidy,
because people who don't pay anything over the year for their
current account clearly have cost something to the supplier".
He described this cross-subsidy as having an "important distributional
Some of the people at the lower end of the income
distribution are cross-subsiding people perhaps in the middle.
Perhaps some people at the higher end of the distribution with
high average balances, on the foregone interest, are also cross-subsiding
some of the people in the middle.
When questioned as to whether he believed such cross-subsidy
was bad per se or was bad because of the lack of transparency,
Mr Fingleton replied that "cross-subsidy is not in itself
something that would concern us" [the OFT] and used the example
of airline pricing to illustrate his point:
If you think about airline pricing, people who
book late cross-subsidise people who book early, and that happens
in quite a competitive market. So we don't necessarily think that
cross-subsidies are inconsistent with the competitive market situation.
80. So-called free banking is not free. The term
free-in-credit banking is a misnomer, given that consumers with
positive balances pay through interest foregone. It misleads the
consumer. It is also clear that so-called free banking has important
distributional consequences. A minority of consumers, often those
on lower incomes, pay explicit charges associated with overdrafts.
This results in high prices and poor outcomes for a sub-set of
consumers. Meanwhile, other consumers, often on higher-incomes
do not pay explicitly for their current account provision, in
spite of the fact that their PCA provision clearly does incur
a cost to the provider. Whilst it is undesirable from the perspective
of 'fairness', cross-subsidy is not always wrong. For example,
cross-subsidy exists in the airline industry where customers who
book early are cross-subsidised by those who book later. However,
pricing is far more transparent and customers can easily switch
airline provider. These conditions are not currently present in
the personal current account where cross-subsidy is opaque and
switching costs are high.
81. John Fingleton argued that his key concern was
"the inability of people to know what they pay for their
bank account and, as a result of that, the inability to make any
meaningful comparison between them.
The bulk of current account revenues come from foregone interest
and overdraft charges, which Mr Fingleton said were "probably
two of the areas the consumer had the least information on which
to make an assessment of what they were paying their existing
bank, or to compare prices between banks". He concluded that
it was "very difficult for consumers to choose between competing
suppliers if they can't see the prices of the aspects where the
most revenue is earned".
Jayne-Anne Gadhia argued that "free banking is a fallacy"
customers are being misled to stay with the big
banks who claim to offer free banking when actually these non-transparent
charges are really what's making them money.
82. Consumer groups were also critical of the opacity
of charges, which they said had two consequences. It made it difficult
for many consumers to understand the true cost of their current
account and made it difficult for consumers to compare costs across
providers. For example, Consumer Focus said that:
Under the prevailing model of so called free
banking, charges are hidden and punitive and present barriers
to comparison. A consumer will not make decisions and cannot make
comparisons on the basis that they are likely to encounter financial
difficulties. Penalty charging is not a fair business model and
is difficult for a consumer to predict or manage.
The Financial Services Consumer Panel said that the
"hidden" nature of charges presented a barrier to comparison.
They told us that charges were often not disclosed in advance,
telling us that information about overdraft charges did not have
to be specifically disclosed to a customer opening an account,
it is enough that the charges are made available via a telephone
helpline, a website; or by asking staff. Finally, the Consumer
Panel were also critical of charges that were labelled in different
ways that prevent comparison.
The Consumer Financial Education Body (CFEB) expressed concerns
about developments in the current account market which "have
meant that products are not necessarily transparent, readily comparable
or understandable". They cited packaged accounts and other
products tied to current accounts which competed, by their nature,
on a variety of features as well as price, noting that "the
FSA has flagged that this may not be of benefit to all who use
83. John Fingleton explained that the OFT had focused
its transparency effort on "those areas where the banks make
their moneyon foregone interest and overdraft charges".
His colleague Clive Maxwell, Executive Director at the OFT, expanded
the banks have committed to being clearer about
the charges that they're applying to individual customers, and
to setting them out much more clearly on their statements. That
is already starting to happen. They've committed to state people's
average balances [...] That is happening in some cases already;
it is beginning in other cases over the course of the next year
Mr Fingleton considered setting out the average balance
over the year was "a good step, because if you don't have
your average balance, it's very difficult to have a quantity to
apply the interest rate to."
Other initiatives currently being undertaken in conjunction with
the banks on a voluntary basis include:
- Enhanced monthly information
- An annual summary of the cost
of their PCAs; and
- Illustrative scenarios showing
unarranged overdraft costs.
A number of providers have now published illustrative
charging scenarios on their websites, whilst links to the charging
scenarios of the major providers in Great Britain can be found
on the OFT's Consumer Direct website. Furthermore, the OFT has
reported that the major PCA providers in Great Britain have all
confirmed that they will implement the remaining transparency
initiatives by or around the end of 2011.
84. When asked whether these initiatives would be
sufficient to improve transparency and comparability, Mr Fingleton
said "we think it needs to go further."
He touched on a number of areas, including foregone interest"being
clear about if one bank is offering a higher rate of interest
than another bank. Given your transaction pattern, how could you
compare those two prices?"
Jayne-Anne Gadhia agreed that this was an area to focus on, arguing
that "it's possible to showcertainly against, let's
say, base ratehow much interest is foregone" but cautioned
that "a lot of work [needs to be] done to understand how
best to communicate that in a simple, clear, straightforward way.
Joe Garner from HSBC, however, told us his firm did not show interest
foregone because their "view is that a current account is
for daily purchases" and that HSBC had "savings accounts
for those who want to accrue interest". When pressed on whether
this represented a cost to the consumer, he replied "no more
than the cost of keeping money in a wallet."
85. Another area where Mr Fingleton felt more needed
to be done was the tendency to "simply to flood consumers
with information and say then, 'Everything is transparent.'".
Instead, "maximum transparencygiving consumers lots
and lots of information" was not:
necessarily any better than giving them no information.
You're catching a waterfall with a teacup; it's not very helpful.
So, it's giving consumers the information that is relevant to
Nationwide also noted that "a balance must be
struck between achieving greater transparency and avoiding information
overload that could potentially increase, rather than reduce,
consumer inertia and apathy, precisely because there is too much
information to digest."
86. Lord Turner considered greater transparency was
a necessary but not sufficient condition for greater competition,
given the particular dynamics of the retail market.
The FSA's submission to this inquiry expanded on some of these
dynamics, arguing that across the retail market there was "substantial
evidence to suggest that consumers generally do not use the information
provided to make decisions or shop around and that "even
when they read the documents, research indicates that many find
them daunting, with some terms difficult to understand."
The FSA also noted that products were "becoming increasingly
complex (the growth of the structured product market is one example),
and as a result it was "increasingly difficult for consumers
to understand descriptions of a number of mainstream retail products."
They concluded by "acknowledging the limitations of disclosure,
by itself, to facilitate effective consumer choice and to secure
good outcomes for consumers."
87. Sir Donald Cruickshank identified problems
with price transparency and the difficulty of comparing products
in his 2000 report on competition in the banking sector. Over
a decade on those problems remain acute. The OFT is working with
the banks to try to ensure greater transparency. It is vitally
important to ensure information is provided in a way which enables
meaningful comparability. We believe that, as a matter of priority,
the OFT and the banks must examine how best to present information
to consumers on net interest foregone. 'Information overload'the
tendency to simply 'flood' consumers with information, acting
to increase consumer inertia must be avoided.
A BARRIER TO COMPETITION?
88. A number of witnesses to this inquiry argued
that so-called free banking discouraged and hindered competition
in the current account market. Lord Turner argued that it "probably
is the case that free-if-in-credit banking does create a bit of
a barrier to new entrants." This was because, as discussed
previously, the current account was "loss making" or
only marginally profitable for providers, which Lord Turner explained
"makes it more difficult for new entrants to come in, because
they cannot make profit just out of the core product" with
the consequence that "they had to immediately be able to
cross-sell other products as well."
Lord Turner also made the point that there were "other important
barriers to new entrants".
89. One aspiring new entrant to the personal current
account marketVirgin Moneyargued that the widespread
availability of 'free banking' meant that all banks seemed the
same to consumers, and there was no obvious financial incentive
for customers to switch their current accounts. They believed
that even where customers were considering switching between current
account providers, 'free banking' meant that it was not easy to
assess likely charges, and it was not possible to compare the
levels of service offered by different banks, except by hearsay.
Virgin Money concluded that 'Free banking' makes it very difficult
for new entrants to the PCA market" and that "new entrants
are not able to compete by offering lower prices (than zero) or
by innovating with simpler, lower-cost products."
90. For many consumers there may be little financial
incentive to switch. Mr Rhodes from Nationwide discussed how "customers
actually believe that a current account, with the exception of
interest foregone on any balance, is free" adding that "for
80% of the population that is correct". He considered that
in consequence it was "incredibly difficult" to "create
[...] pull demand in a market where 80% believe it [PCA banking]
is free." He dismissed the possibility that competition would
take place on interest foregone saying that was "a very few
When pressed on this point Mr Rhodes said that "the average
in credit balance in a UK current account is about £1,500,
so if you put base rate as an anchor rate to do a calculation,
you get £7.50 a year."
When quizzed on the unusually low current base rate, Mr Rhodes
redid the calculation: "If you put your best instant access
rate that you could get from a high street provider, about £30
a year. That is your foregone interest cost." He argued that
this simply was:
not a lot in terms of convincing you to move
your account even if you put an in credit interesteven
if you disclosed that number, worked out the price, it is not
a significant driver to cause you to switch your current account
[...] Whereas the charges are more significant but most people
believe they will never pay them, and 80% in reality never do.
He told us the result was it was difficult to attract
new consumers by saying "come to Nationwide because you have
your free account", so "a whole range of other incentives"
had to be added, which made "it very expensive to recruit
new personal current account customers" and "then your
earnings only occur at the back end of the process when customers
start to incur the overdraft structures that we know so much about.
So, unless you have a back book of current account customers,
day one you have no income".
Tesco Bank told us that new entrants were "placed at a further
disadvantage by the ability of incumbent banks to offer attractive
rates to new customers, which they pay for by giving very low
rates to their existing customers". This they said was also
a common practice in the savings market.
91. But price is not the only driver of competition
as Metro Bank told us. Representatives from Metro Bank, whilst
saying competition could take place within the free-banking model,
did not believe such competition was primarily driven by price.
Anthony Thompson, Chairman, noted a recent OFT report which:
said that only 7% of people move their current
account because of rate, for 93% it's around service and convenience.
So the banks, I think, seem to have persuaded everyone that this
is a rate driven environment. The reality is it is not rate driven.
People want value, they want fairness, they want transparency
and value is an amalgam of many, many different things, not just
The future of free banking?
92. There has been a growing debate around the future
of so-called free banking. For example, former Barclays Chief
Executive, John Varley, has publicly stated that "it is possible
that free-in-credit banking is a structure that has outlived its
time", adding that the concept was "idiosyncratic by
the standards of the world" and "worth re-examining".
When John Fingleton was asked about the future of so-called free
banking, he said that he "wouldn't favour saying that you
should regulate to have fixed fees for banking" adding that
"seem to be heavy-handed". Mr Fingleton believed that
greater transparencydiscussed earlier in this chapterand
"paring away at hidden charges, so that you are forcing the
banks to put more and more of it up front" could lead to
the emergence of "more products with up-front fees".
In such a scenario, "you might still have some free-if-in-credit
banking, but cross-subsidised in a more transparent way that enables
better switching between consumers". He argued "that
type of diversity in the consumer offering might be better than
trying to impose a standardised approach".
Ms Ana Botin argued the key issue was "choice" and spoke
of packaged products which Santander was introducing in the UK
as evidence that the market was evolving to provide greater choice
We have brought out a number of products of packaged
accounts. I believe it's a very interesting product. We did a
lot of that in Banesto in Spain,
so we would have a flat fee account and you would pay anything
from 5 a month to 15 and would get a different value
for that. This is not a very big market right now in the UK, but
some customers like it and we have brought out different models
of it. What's important is choice.
Joe Garner spoke of how HSBC was trying to increase
choice for its customers. He explained that HSBC had introduced
"a £15 a month current account with no charges whatsoever"
which it was "impossible to incur charges on." He said
the account had "not taken off to a great degree".
93. RBS argued that "there is a widespread perception
amongst the UK public that core banking services such as current
accounts and credit cards should be provided for free". The
consequence of this, they argued, was "that it would be commercially
difficult for a bank, as a first mover, to start charging for
Ana Botin concurred saying that the free banking seemed "an
ingrained model for the UK banking consumer" and it was something
"people value and it seems to work".
This viewpoint was echoed by Which? whose research showed "that
consumers would be very price sensitive if faced with an explicit
charge, such as monthly or annual charges for operation of their
current account, and would switch to a non-fee account."
94. Which? considered that the only direct measure
to change current account charging models would be a form of price-control:
regulating banks' charging structures to ensure explicit regular
charges for holding a bank account. This they concluded would
be "a complex and significant intervention in the market."
They warned of the "serious risk of unintended consequences"
unless "regulation to impose an explicit fee also then set
controls on any other charging options or price structures that
may also be adopted", claiming that failure to this would
risk creation of both an upfront fee and continuation of
hidden or opaque charging models.
This would be an extremely intrusive level of regulation.
SUPREME COURT DECISION ON ASSESSING
FAIRNESS OF UNAUTHORISED OVERDRAFT CHARGES
95. £3.6 billion, almost 50% of total bank revenues
from current account provision derive from overdraft, insufficient
funds and other charges. In March 2007 the OFT opened an investigation
into the 'fairness' of certain charging terms relating to unarranged
overdrafts under the Unfair Terms in Consumer Contracts Regulations
1999 (UTCCRs). Subsequently, in July 2007 the OFT entered into
a litigation agreement with eight PCA providers and commenced
a test case to assist in securing a clear and orderly resolution
of the fairness of these charges. The test case ultimately led
to a Supreme Court judgment, dated 25 November 2009, which overturned
previous High Court and Court of Appeal rulings that unarranged
overdraft charging terms could be assessed in full for fairness.
The United Kingdom regulations transposed a European Directive,
which specified that an assessment of unfairness could not relate
to the definition of the main subject matter of the contract or
the adequacy of price or remuneration as against the goods supplied
in exchange. The
Supreme Court considered that overdraft charges were provided
as part of a package of terms and conditions and that individual
aspects of that package could not be considered for unfairness
as ancillary items. John Fingleton told us that the OFT was "surprised"
to lose the Supreme Court case on unauthorised overdraft charges
but said the OFT had "to accept the Supreme Court's interpretation
of the law."
96. After detailed consideration of the judgment
and of the various options available to it, the OFT concluded
that any investigation it were to continue into the fairness of
current unarranged overdraft charging terms under the UTCCRs would
have a very limited scope and low prospects of success. Given
this, it decided against taking forward such an investigation.
Instead, the OFT decided to work together "with the major
PCA providers in Great Britain to voluntarily agree to implement
a number of initiatives that will make the costs of PCAs more
97. Lord Turner emphasised that "there was a
clear legal decision [...] that the banks were justified in doing
this", but he stressed that "the appropriate regulatory
authority should be directly looking at both the transparency
and indeed the level of unauthorised overdraft charges."
Which? told us that they did not believe "that the current
voluntary, market driven initiatives to address concerns about
unauthorised overdraft charges" were "delivering sufficient
improvements for consumers" adding that they did not believe
"sufficient improvements will be delivered without the Government
taking legislative action." They pointed to "developments
in the market since the Supreme Court handed down its decision
last year. While banks are becoming more transparent about their
unauthorised overdraft charges, the fees are still extremely high
and, for some consumers, are now higher than prior to the Supreme
Court decision." Consumer Focus considered that unauthorised
charges had been creeping up again and authorised overdraft charges
had increased significantly to ensure profit margins are retained.
98. The predominance of so-called free banking
in the UK appears to suggest a clear consumer preference for this
particular model. However, consumers are not provided with sufficient
information about charges to make an informed choice. The predominance
of this model prejudices competition in the personal current account
market by obscuring those costs, and probably also by increasing
the advantages enjoyed by existing banks. Greater transparency
will alter consumer behaviour not least by revealing the hidden
charges inherent in the free-in-credit model. Complex regulatory
interventions in the market to constrain free banking could well
be counterproductive to competition and are likely to increase
costs to business and the consumer. However measures to increase
transparency do not carry these disadvantages. We strongly support
the OFT's efforts to improve the information that banks give on
costs and charges. We recommend that the Independent Commission
on Banking should examine the impact of free-in-credit banking
on competition in the personal current account market, and, in
particular, what is appropriate action to ensure the provision
of adequate information to consumers to enable them to make meaningful
99. Even if changes were made to improve price transparency,
competition would not be efficient if customers found it difficult
to change provider. The ease of 'switching' from one current account
provider to another was identified as a problem in the Cruickshank
report and remains a barrier to competition. The switching process
has a number of stages.
- Awareness: Consumers are prompted
to switch by becoming aware that they may not be getting the best
- Information gathering/obtaining
advice: Consumers gather information about alternative products
and/or obtain advice from a third party.
- Choose/buy: Consumers weigh
up the different options and make a decision as to which to buy.
- Execute: Consumers execute
the switch and/or contact their provider / providers who executes
the switch for them.
- Post mortem: Consumers reflect
on the costs and benefits of their decision and decide whether
to switch products again.
100. The OFT in Review of barriers to entry, expansion
and exit in retail banking concluded that "new entrants
face significant challenges in attracting personal and SME customers",
specifically referring to "low levels of switching"
as a key barrier.
Tesco Bank said the effect of such "inertia" was "most
seriously and negatively felt by new entrants seeking to establish
themselves in the current account market."
101. Benny Higgins stressed the importance of switching
to competition, saying that "the freedom to switch between
suppliers was 'a necessary component of competitive markets'",
and that "disclosure, full information" and "a
minimum number of barriers to switching" were prerequisites
for "a competitive market".
102. Our inquiry explored how long it typically took
to switch current account providers. The estimates we were given
ranged from two weeks to two months; transferring direct debits
was identified as the part of the process most likely to cause
103. We tried to establish how many people were switching
personal current accounts. Eric Daniels told us that at Lloyds
Banking Group it was "somewhere between 7% to 11% of the
customer base every year". He described this figure as both
"very high" and "about the international norm."
Brian Hartzer gave the comparable figures at RBS as "about
9% of accounts" which he described as 50% higher than in
Higgins was dismissive of these figures, claiming that if you
take out secondary accounts, the real underlying switching rate
was "probably more like 3%. It's very, very low."
Jayne-Anne Gadhia was similarly dismissive of the 7% to 11% figure,
telling us "that the underlying rate of switching is probably
less than 5%."
She believed that the level of switching had fallen since the
financial crisis began because "people have been less ready
to take the risk of switching accounts", describing this
Of the five largest current account providers only Ana Botin of
Santander acknowledged that "the level of switching is low."
104. Some of the banks suggested that the switching
statistics under-estimated the number of people changing accounts,
because as Antony Jenkins pointed out most consumers have 2.4
personal current accounts. He said "many of those [accounts]
are with different institutions, so people try before they buy".
Nevertheless, the OFTusing research from the EC Consumer
Market Scoreboardidentified an annual switching rate in
the "PCA market of 9.2% in 2009 compared to around 6% in
2006." They concluded that "overall, switching rates
for both PCAs and business current accounts remain low" when
compared to other sectors.
105. The OFT's view that switching rates in current
accounts was low in comparison with other sectors was shared by
Consumer Focus. That organisation contrasted switching rates for
current accounts, described as having "lagged at around 7%
for the last 10 years", with utilities such as energy and
phones which showed "switching rates well in excess of this,
starting at 26%". Benny Higgins contrasted the current account
with the credit card market where "in the last twelve months
no less than 27% of customers have either taken a new card or
a first card and [...] 14% closed the card they had. The lesson
was that, in a market with "transparency around what you
get charged" and "where there is an ease of switching",
"customers will be more active."
106. There are a number of possible explanations
for the relatively low level of switching in the personal current
account marketnamely, difficulties whether real or perceived
with the switching process, the fact that the majority of consumers
are satisfied with their current account provider or consumer
PROBLEMS WITH SWITCHING
107. The industry has removed the need for customers
to write a new Direct Debit mandate to each service provider with
new bank account details. Instead, the new bank takes care of
informing the customer's service providers of the new account
details. This is a major improvement for the customer but they
can still have a problem with a Direct Debit payment if:
- The new bank is slow to request
the customers direct debit and standing order details from the
- The original bank is slow to
send the information to the new bank, and
- The service providers are slow
to update their records in a timely fashion to avoid charges being
requested from the old account; and finally
- The remitterfrequently
the customer's employeris slow to change their records.
A further and growing problem with switching is that
the 'remitter' (for Direct Credits) is not just a customer's employer,
but increasingly a large number of other people. With the growth
of internet banking (and rapid decline in cheques), consumers
increasingly use bank account details to make payments for goods
and services (and for person to person payments). Switching bank
accounts therefore creates the significant risk of such payments
going astrayand this is a further deterrent to switching.
Moreover, there is currently no system or simple solution to address
108. Cut Loose
confirmed that "the vast majority of accounts are switched
without any problems for the customer", but said that "for
every customer who is inconvenienced there will be many who hear
about the problems and decide not to switch":
The personal risk that bills won't be paid or
salaries won't go to the correct account is at the heart of customer
concern when switching. The inconvenience and embarrassment to
the customer when payments going 'wrong' is high and customers
run the risk of such an error negatively impacting their credit
reference score. Correcting these problems is time consuming and
frustrating for the customer. These potential issues undoubtedly
contribute to the low level of account switching experienced in
the UK, with customers preferring to open multiple current accounts
or simply stay with their existing bank.
This viewpoint was shared by Vernon Hill, who said
"customers are scared to death that something is going to
go wrong. The story we hear all the time is, "Oh, my God,
the Sky TV payment is not going to get moved over, my Sky is going
argued direct debits were at the heart of the problem:
What makes it structurally harder in Britain
than in America is the direct debit system you have or standing
orders. That doesn't exist in America so it's easier to move accounts.
When people move to usand they're moving every day to uswe
have to line up their direct debits and their direct credits to
make it happen. It takes more effort and it takes more time. We
do it by doing it for the customer but your system of direct debits
does inhibit accounts moving.
Jayne-Anne Gadhia referred to the perceptions that
the switching process might go wrong "the trouble
is that so many people think it might not happen perfectly, and,
"I need it to happen perfectly and my life's too busy to
worry about my direct debit."
Benny Higgins told us that OFT data showed that "a quarter
of customers who switched said they wouldn't do it again"
whilst "a third of customers who switched said they wouldn't
recommend it to a friend or member of their family."
FRAUD AND FEAR OF SWITCHING
109. We were keen to understand if the fear of fraud,
in particular regarding online banking, was discouraging customer
from switching and using internet only accounts. Mike Bowron,
Commissioner of the City of London Police told us that:
I can understand why some people would be reluctant
to switch, but I suppose it is incumbent on us to help to educate
people to have the confidence of knowing what to look for in terms
When we pressed him about whether a customer is at
higher risk of fraud with internet banking he conceded:
I suppose, logically, you are when you switch
to internet banking because you're transferring your personal
details over the ether.
Although he did explain that he was personally very
comfortable with using internet banking: "I use it, and I'm
confident when I use the internet to do my own personal banking."
John Fingleton responded in a letter to our concerns
about internet fraud and the possible impact on customer inertia:
[...] there is a common perception that the internet
is susceptible to fraud... however, this concern is often uncorrelated
with the number of fraud cases occurring. For example, in 2009,
reported internet fraud in the UK decreased by 15% from 2008,
whilst internet transactions increased by 14% during the same
He said that the OFT had, as part of their work on
retail banking explored the reasons why consumers were reluctant
to switch. Mr Fingleton's conclusion was that their research had
"not identified the fear of fraud as a key factorthe
most significant factor deterring switching was a fear that the
process was too complicated and problems occurring that disrupt
regular financial transactions."
Given that a much greater share of the market is likely to
be taken in by the internet in later years it is surprising how
little work has been done to improve security, and the lack of
detail apparently available to the police concerned us. We recommend
that the regulatory and competition authorities return to this.
110. The OFT placed a different emphasis on their
research on switching with Clive Maxwell describing "significant
improvements in the switching process being driven by BACs, which
is the central organiser of the payment system around this".
He boasted that the number of complaints around switching had
"fallen from something like 30%, 32%, [...] of customers
down to less than 10% of customers who have switched current accounts"concluding
jubilantly "We've seen some improvements there."
Nonetheless, Which? said the results of their membership survey
on the switching process showed "nearly 80% found the process
easy"; "10% reported "having to manage the process
themselves, and consequently found it much more difficult to do
so"; "40% experienced a problem with direct debits or
standing orders being transferred incorrectly, a problem with
the helpfulness of their old bank or with the length of the overall
111. Sir Donald Cruickshank said that "retail
banking markets lack a dynamic seen in most parts of the economy
in that customers chose not to switch supplier even after having
been subject to high costs and/or very poor levels of service."
He attributed this to:
the cost to the customer of time, hassle and,
it is feared, the potentially costly disruption of relationships
with providers of other services who rely on standing orders or
direct debit payments. Despite recent improvements to the switching
process, this is still a major problem.
Sir Donald Cruickshank argued that:
a regulator, armed with independent authority
over money transmission systems would make a huge difference,
certainly in retail markets where the current account market is
key. Why shouldn't a retail customer's bank account numbers be
personal and recognised as that by the systems used to communicate
between banks and to transfer value between bank accounts? Why
shouldn't the hassle and cost of transferring a personal account
from one bank to another be suffered by the banks and their engineers
(who incidentally, if my experience of introducing number portability
for telephony is anything to go by, would relish the challenge).
There are other changes that an independent regulator of money
transmission systems could deliver eg credit card transactions
at cost, but improving the dynamic of the market for current accounts
would be key. 
Sir Donald Cruickshank expanded on these points in
oral evidence, stressing that the current account is so important
to the bank because of our inertia, and their opportunities to
sell on other products [...] breaking that hold, or rather making
it absolutely clear that they had to serve you well, clearly and
faithfully, would make a huge difference."
112. When quizzed on the feasibility of account portability,
Sir Donald Cruickshank referred to his time as regulator of the
telecommunications sector, telling us that "number portability,
which you all enjoy now in telecoms, was something that I drove
through in the 1990s, first on the fixed line and then mobile."
In each case the estimates of the cost were huge.
You could get an engineer sitting in front of a body like this
demonstrating how expensive it was going to be. However, if you
drive it through, that same engineer is delighted to have the
challenge and the costs are trivial. The engineers get at it,
they are legitimised to get at the issue and in today's world
they should be able to deliver it very easily. I would go further:
they should be able to deliver it in ways that are cost saving
for the bank, as well as service improving for us.
113. We asked witnesses whether they agreed with
Sir Donald Cruickshank that greater account portability could
be a solution to problems around switching. Many of the so-called
challenger banks, including Virgin Money were supportive. Jayne-Anne
a key issue from a transfer point of view, is,
wouldn't you feel so much more confident if you could simply move
your account number to me or to Metro and know that all your direct
debits and standing orders moved with it? 
Ms Gadhia was dismissive of those who argued it was
technically difficult or too expensive, telling us that "if
we can give everybody a single National Insurance number, and
we've been able to do that for decadeswe can change everybody's
telephone number whenever they want to change between phone providerswe
should be able to change people's bank accounts". She concluded
that such a change "would revolutionise the way in which
the banking system worked".
Although Vernon Hill initially told us that moving accounts from
bank to bank with the same account number was "a good idea",
but "very unlikely to happen" due to differences in
IT systems, Metro
Bank subsequently told us they believed account mobility was possible
and was "a practical solution to providing customers more
freedom of choice", adding that "we urge this option
114. John Fingleton picked up on the analogy between
telephone number portability and account portability raised by
Sir Donald, stressing there was "an important difference":
It is critically important with telephone numbers
that everybody else knows your telephone number. Therefore, changing
your telephone number is very costly: you have to change your
business cards; you have to tell everybody; you risk losing contact
with people you haven't seen for a while, and so on, when you
change your telephone number. [...] you can function [...] without
everybody you know knowing your bank account number, so the benefits
of that and the costs associated with switching are slightly different.
His conclusion was that "the benefits of having
number portability here are probably lower than with telephone
numbers." Mr Fingleton stressed that the cost of number portability
also needed to be brought into the equation and that his "intuitive
hunch would be that it could be very costly and not worth while
doing it in the short term."
However, whilst saying that number portability wouldn't be his
"top priority" in the "next year or two",
he confessed that he was "attracted to it as a long-term
vision for the market". Mr Fingleton sketched one possible
if you said, "From 2020 or from 2025 that
is what we expect", you might give the banks the time to
make sure that the upgrades to IT systems that happen over the
next 10 years move in that direction; so you set it as a longer
term objective. That would be a much less costly way of achieving
115. Others were less supportive of portability,
arguing variously that the costs would outweigh the benefits,
that it could be technically difficult, that consumers would end
up picking up the tab, and that there were more cost effective
ways to improve the switching process. Antony Jenkins admitted
it was "possible to create a portable account number for
customers", stressing "there was no doubt about that"
and that "with enough time and money, the technology exists
to do that". However, "the cost of doing that would
be very significantat least in the hundreds of millions,
probably in the billions."
Mr Jenkins questioned "whether the benefit of improving the
switching process outweighs the cost" and that the Barclays
view "would be that it would not." Eric Daniels also
acknowledged that it was "not beyond the wit of man to figure
out a different system" but was also sceptical "that
you would ever be able to justify that investment."
Stephen Hester also felt that the benefits of account portability,
which he described as "the incremental ease of switching"
would be "outweighed by the disbenefit", which Mr Hester
said would be "massive".
Even Mr Higgins who thought portability "was the embryo of
a very good idea" feared it would be very expensive."
116. Helen Weir cautioned that such costs "would
ultimately be borne by the customer".
Antony Jenkins also questioned whether the diversion of resources
into developing a system of account portability would really be
in the interests of consumers:
in addition to the investment required to retool
the whole payments infrastructure, there would be a massive opportunity
cost in the deflection of technology and resources to that sort
of activity, away from some of the innovations that I was referencing
before in terms of branch refurbishment, mobile, internet, contact
lists and so on.
117. The technical way in which account portability
is secondary: what matters is that switching should be simple
and safe. Cut Loose considered that improvements could be made
within the current system to "allow a customer to switch
accounts without the potential for transactions to go wrong during
the switching period." They explained how this could be done.
As part of the existing switching mechanism,
banks submit a request via BACS to the original bank to send details
of the customer's Direct Debits and Standing Orders. This request
could be used by BACS to set up a cross-reference holding both
the old and the new Sort Code and Account Number details.
When BACS routes transactions, they check the
cross-reference and if it holds a new Sort Code and Account Number
the routing is done to the new bank.
Vocalink, the company jointly owned by the major
UK banks and building societies which processes all BACS payments
(Direct Debits and Direct Credits) told us in their written evidence
said that the current system was working well.
We believe the consumer inconvenience in switching
banks has been largely removed by the ToDDaSO [Transfer of Direct
Debits and Standing Orders] service, although there is potential
for further innovation in this area.
118. A supplementary submission from the Payments
Council explained that:
there is scope for reviewing the ToDDaSO service
to see how it can be improved for customers and we will be working
with Bacs, which runs the service, to consider this. Additionally,
we will be proactively engaging with our members to see what further
collaborative arrangements, beyond those under ToDDaSO could better
facilitate the process of switching for customers.
119. The Payments Council also agreed that account
portability would be considered although they pointed out that
previously they had come to the conclusion that this was not the
best way to facilitate switching.
Whilst we have no reason to believe that the
evidence that led the industry, as well as external commentators,
to conclude that this was not the best way of facilitating switching
has changed in any material respect, we will nevertheless commit
to reviewing this again.
120. There are other measures which could improve
the switching process. Tesco Bank suggested a range of measures:
- Penaltiesthe company
forfeits payment for the month if they attempt to take funds from
the old account;
- incentivesleague tables
for the best/worst performers;
- contractual liability to the
customerthe Direct Debit payee is liable to pay damages
for late transfer; or
- enforcement through a central
agency, possibly funded by Direct Debit payees, which would undertake
the switching process on behalf of customers.
121. Competition can only be effective if consumers
feel confident in switching to new providers. Although there is
evidence that the system has improved, the perception remains
that there are still risks involved in switching, and levels of
switching remain low. We believe it should be possible to find
technical ways of making switching easier without excessive costone
such suggestion has already been submitted by Cut Loose. We recommend
an independent technical study should be done into how account
portability could operate. There are also ways in which switching
can be made easier without new technical infrastructure. These
need to be explored more urgently by the regulator. This should
include provisions that the provider, not the customer, should
be penalised if things go wrong.
65 Q 48 Back
OFT, Review of barriers to entry, expansion and exit in retail
banking,p 130-131, para 7.18, Table 7.1, November 2010 Back
Q 643 Back
Q 402 Back
Q 194 Back
Q 200 Back
Q 194 Back
Q 324 Back
Ev 202 Back
Ev 218 Back
Ev 228; The OFT's 2008 market study on personal current accounts
estimated that banks generated revenues of £560 m from packaged
accounts in 2006 Back
OFT, Personal current account market study, p 17-18, July
In Review of barriers to entry, expansion and exit in retail
banking, the OFT cite a figure of £9 billion for
2009. This figure comes from Datamonitor Back
Q 157 Back
OFT, Personal current accounts in the UK :An OFT market
study, p21, July 2008 Back
Q 807 Back
Q 151 Back
Q 850 Back
Q 853 Back
Q 918 Back
Q 162 Back
Q 238 Back
Q 36 Back
Q 149 Back
Q 154; The figure of a price of coffee per week appears to come
from adding the £35 net interest foregone figure to half
of the OFT's £152 given that 50% of Lloyds revenues derive
from charges, overdraft fees levied on consumers. This results
in an annual figure of £111 per annum which roughly equates
to a £2 cup of coffee per week. Back
Q 180 Back
Q 53 Back
Q 30 Back
Q 399 Back
Q 242 Back
Q 148 Back
Q 849 Back
Q 27 Back
Q 809 Back
Q 809 Back
Q 809 Back
Q 810 Back
Q 810 Back
Q 762 Back
Q 634 Back
Ev 177 Back
Ev 244 Back
Ev w22 Back
Q 810 Back
Q 781 Back
Q 763 Back
OFT, Review of barriers to entry, expansion and exit in retail
banking, para 7.27, p 134, November 2010 Back
Q 762 Back
Q 764 Back
Qq 856-857 Back
Q 762 Back
Ev 188 Back
Q 55 Back
Ev 225 Back
Q 48 Back
Ev 181 Back
Q 988 Back
Q 991-994 Back
Q 995 Back
Q 988 Back
Ev 213 Back
Q 470 Back
Financial Times, Barclays chief calls for rethink on free banking,
3 December 2010 Back
Q 813 Back
Banesto, a Spanish bank, was Ms Botin's former employer Back
Q 755 Back
Qq 854-855 Back
Ev 218 Back
Q 755 Back
Ev 202 Back
Ev 202 Back
Council Directive 93/13/EEC, Article 4(2) Back
Q 759 Back
See also Q49 Back
Q 49 Back
Ev 176 Back
OFT, Review of barriers to entry, expansion and exit in retail
banking, p 6, para 1.10, November 2010 Back
Ev 213 Back
Ev 412 Back
Q 223, Q623, Q452 Back
Q 222 Back
Q 322 Back
Q 410 Back
Q 635 Back
Q 642 Back
Q 752 Back
Q 622 Back
OFT, Review of barriers to entry, expansion and exit in retail
banking, p6, para 1.10, November 2010 Back
Q 410 Back
Cut Loose are a niche consultancy advising potential new market
entrants and helping existing banking organisations to expand
their offering. Back
Ev w52 Back
Q 452 Back
Q 448 Back
Q 680 Back
Q 407 Back
HC 430 - viii, 16 November, Q 531 Back
Ev 255 Back
Ev 255 Back
Q 781 Back
Ev 237 Back
Q 127 Back
Q 130 Back
Q 678 Back
Q 680 Back
Qq 449-456 Back
Ev 248 Back
Q 816 Back
Q 816 Back
Q 816 Back
Q 624 Back
Q 230 Back
Q 329 Back
Q 408 Back
Q 172 Back
Q 624 Back
Ev w53, Ev w54 Back
Ev w7 Back
Ev w57 Back
Ev 213 Back