Banking needs a revolution – not a comparison website: Challengers savage report calling for customers to switch banks

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Challenger banks have openly mocked proposals from the regulator that the best way to boost competition in banking is for consumers to shop around rather than make fundamental changes such as breaking up the big banks.

The Competition and Markets Authority put out a report last week detailing its current plans and concluding its year-long investigation into the sector by suggesting a blizzard of transparency initiatives and prompts for customers to switch.

One challenger bank source called the CMA’s plans ‘seriously lightweight’, while one boss implied they amounted to nothing more than a new price comparison website.

Fair play: Challenger banks are calling for a level playing field, like that in the supermarket sector

The CMA’s suggestions include: payment processing body Bacs spending more on advertising current account switching services; moves to smooth the process of changing accounts; and a new website for small and medium-sized business current account holders.

But the competition body ducked calls for an end to free-if-in-credit current accounts and a more radical break-up of the banks.

Some smaller banks were seething at the timidity of the CMA’s findings. Paul Lynam, who is chief executive of Secure Trust Bank and chairman of the British Bankers’ Association’s challenger bank panel, said that discount supermarkets Aldi and Lidl have been able to take market share from the likes of Tesco and Asda because there was a level playing field.

‘No such level playing field exists in banking and the CMA provisional proposals fail to address the fundamental inequities in capital, funding, access to payments and proportionate regulation,’ he said.

Lynam has been very critical of bank capital rules that allow large banks to use their own internal risk models to calculate how much capital they need to set aside for a mortgage loan.

The internal models result in much lower capital requirements than standard models, which new entrants have to use.

Lynam added: ‘It is important that as the CMA considers its final findings, it initiates the steps needed to create the same sort of level playing field that has seen competition flourish in the supermarket industry. A price comparison website is not the answer.’

Lynam’s comments reflect wider anger among smaller banks that the CMA has ducked the big issues. ‘We are disappointed. We think the remedies are seriously lightweight,’ one challenger bank source said.

The CMA’s report detailed how the biggest banks profit from customer inertia. More than half of customers have been with their bank for a decade while more than a third have not moved for more than 20 years.

Only 3 per cent switched in 2014 and the report said that heavy overdraft users could save themselves £260 a year if they switched to the best account available to them.

Scathing: Secure Trust Bank’s Paul Lynam said a price comparison site – like GoCompare, above – was not the answer

Andrew Tyrie, chairman of the Treasury Select Committee of MPs, was savagely critical of the report last week. ‘Free in-credit banking is a con trick and it is disappointing that the CMA have decided that it should be allowed to continue,’ he said. ‘This part of the CMA’s conclusions is going to take a lot of justifying. Bank customers are not seeing that justification yet.’

The CMA will be grilled by Tyrie’s committee in ten days’ time.

Simon Hunt, head of banking and capital markets at accountancy giant PricewaterhouseCoopers, said: ‘The lack of focus by the CMA on free-if-in-credit current accounts could be a missed opportunity to really shake up a model which is arguably unsustainable and stifles competition through its lack of transparency.’

But he added that new technology might still shake up the sector. ‘Our research has shown that as technology in the sector matures, customer switching rates could double, costs for the industry could reduce by 30 per cent and profit pools at banks could shrink by 10-20 per cent.’

For Lynam, the CMA report is the latest betrayal of a promise made by George Osborne in 2013, when he said that the banking sector ‘verges on an oligopoly’.

‘I want to make it easier to start a small bank and grow the business,’ the Chancellor said then.

Lynam said: ‘We told the CMA it needed to avoid a narrow focus on current accounts and instead take a holistic perspective so it could understand the big barriers to growth. It has failed to address these issues.’

A CMA spokesman said: ‘We think it is a radical report and the provisional remedies would make a great deal of difference. Nothing is decided yet. We think once people look into the detail they will see it is very radical.’