3.1 Banking services – the competition for current accounts
Twenty years ago, doing banking business involved regular trips to your branch to pay in cheques and organise other financial transactions. These days the use of cheques has diminished as people routinely use internet banking facilities to check their bank balance, move money between accounts and settle payments. The facilities offered extend to more than just current account operations, with the capability to open savings accounts and arrange loans online without the need to visit a bank branch.
The move to internet banking is clearly affecting the high street with hundreds of bank branches being closed and with some smaller communities being left without a single bank branch. In 2015, the commitment by banks never to close the last branch in town was abandoned and the prospect is that, with the popularity of online banking, hundreds more bank branches will close in the coming years.
Another contemporary feature in banking services is the fierce competition for current account business. Some banks are offering upfront cash payments to those signing up, and others are offering interest rates on current account balances that are materially higher than on conventional savings accounts. Some current account products offer deals on insurance products – for example, travel insurance. However, those offering such products have to do checks to ensure that the insurance product involved is suitable for the customer.
The financial rationale is simple: with current account business comes the greater likelihood that customers will opt for the institution’s other offerings like loans, mortgages and insurance products. The margins made on cross-selling business, combined with the lower rates offered on conventional savings products, subsidise the keen rates and other incentives paid to those new current account holders they attract. The ability to cross-sell is accentuated by the fact that access to current account activity alerts banks and building societies to behavioural patterns that help sell further products. Current account customers also visit branches more often than other customers, providing further opportunities to cross-sell.
This development has been helped by new regulations that require current account providers to be able to switch accounts within seven working days, with standing orders and direct debits being automatically transferred in the process. With only 9 per cent of account holders taking advantage of this new flexibility in the last 3 years, there is a large pool of potential customers for banks and building societies to target and to bombard with incentives.
In October 2015, the Competition and Markets Authority (CMA) released the findings of its inquiry into the UK current account market. The CMA concluded that customers could, on average, save £70 a year by switching their current account provider. The CMA found that 57 per cent of customers had stayed with the same current account provider for more than 10 years and 37 per cent had not moved accounts for more than 20 years (BBC, 2015).
To facilitate greater switching the CMA recommended that:
- banks should prompt customers to consider switching accounts at certain ‘trigger’ points – for example, if the bank increases its overdraft charges
- banks should set up a current account price comparison site for small business customers
- banks should fund an advertising campaign to encourage people to use the Current Account Switching Service.
Those seeking to switch accounts should check whether the deals on offer only apply if the monthly salary is paid into the new account. The interest structure for balances should also be checked carefully – in some cases the highest, ‘headline’, interest rate advertised only applies above a defined minimum balance that can be as high as £3000 or more.