Competition and choice in retail banking - Treasury Contents

Written evidence submitted by Cut Loose


1.  Cut Loose welcomes this inquiry as an important further contribution to the debate on the future shape of the banking industry.

2.  Cut Loose supports measures to increase prudential competition including the removal of barriers to entry and expansion of the market.

3.  In this submission, Cut Loose addresses the issue of Direct Debit and Direct Credit transfers within the Account Switching process as a barrier to consumers changing their banking service provider.


4.  The vast majority of accounts are switched without any problems for the customer.

5.  However, for every customer who is inconvenienced there will be many who hear about the problems and decide not to switch.

6.  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.

7.  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.


8.  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:

—  (a)  The new bank is slow to request the customers direct debit and standing order details from the original bank;

—  (b)  The original bank is slow to send the information to the new bank; and

—  (c)  The service providers are slow to update their records in a timely fashion to avoid charges being requested from the old account.

9.  The customer is personally responsible for ensuring remittances to their bank account by Direct Credit (eg salary) are changed to their new account. This means they have to write a letter to remitters with the new bank details, BACS provides sample letters on their website.

—  (a)  The customer is at risk of having a problem with a Direct Credit receipt if the remitter is slow to change their records. Since the remitter is frequently the customer's employer and primary source of income, the outcome is potentially a real problem for the customer who then has to both move the money to the new account and keep reminding the employer to change their information.

10.  The process of account switching is complex, requiring timely information to be provided between:

—  (a)  the customer,

—  (b)  the original bank,

—  (c)  the new bank,

—  (d)  the customer's service providers who bill the customer using a direct debit, and

—  (e)  the customer's remitters who transfer money to the customer using a direct credit. (eg employers).

—  (f)  This is further complicated by the differing levels of back office automation in service provider and remitter organisations. Small organisations are likely to have manual processes to setup direct debits and credits while larger organisations are likely to be more automated.

11.  The suggested timeline for the completion of the switching process is currently around three weeks.


12.  In the evidence from Sir Donald Cruikshank the possibility of changing to portable bank account numbers was suggested as a possible solution, emulating his success in establishing portable fixed and mobile telephone numbers in the Telco sector.

13.  Whilst undoubtedly possible in the banking sector, this would require a significant change to core processing systems across the sector at a huge investment cost and would not resolve the problem. All the banking systems in the world rely on a "Sort Code" to identify the Bank that transactions are sent to. The UK could not change this in isolation from the rest of the world.


14.  Cut Loose believes that further improvement to the Customer's Switching Experience is both desirable and possible in principle.

15.  Cut Loose believes that the existing switching process, provided through BACS and free to the customer, is efficient and essential to ensure orderly transition from one bank account to another.

16.  The legal, compliance and processing considerations that enable customers to benefit from the advantages of Direct Debit and Credit transfers are borne by the banks, service providers and remitters and must carry as much weight as the desire to make account switching painless for the customer.


17.  The solution must provide legal and compliance protection for all the parties involved.

18.  The solution must integrate with the current process and avoid adding any additional onerous processes for the customer, the original bank, the new bank and the service providers and remitters.


19.  Cut Loose believes that in principal, BACS could be at the heart of a technical solution that would allow a customer to switch accounts without the potential for transactions to go wrong during the switching period.

—  (a)  At the point of opening their new account the customer agrees to all of their existing Direct Debits and Credits being redirected to their new account.

—  (b)  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.

—  (c)  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.

—  (d)  The new bank now receives all the customers Direct Debits and Credits automatically. In effect an instant Account Switch is achieved.

—  (e)  The rest of the Account Switching process is completed as it is today to change all the information held at the service providers and remitters.

—  (f)  The new bank can track when the service providers and remitters have made their changes and ultimately send BACS an instruction to remove the customers cross-reference when it is no longer needed.


20.  Cut Loose understands that the technical development of the cross-reference by BACS is more complicated than the principles outlined above imply. Nonetheless, we believe this is achievable with a degree of effort appropriate to removing a key barrier to Account Switching and therefore enabling increased competition in the market.


Cut Loose is a niche consultancy advising potential new market entrants and helping existing banking organisations to expand their offering.

January 2011

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Prepared 2 April 2011