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Is there any competition in UK banking?

So along I go to the Independent Commission on Banking’s (ICB) Hearing this week on bank competition and financial inclusion.

The evening is the last of several meetings that have taken place across the country, as part of the Government sanctioned Independent Commission review of the structure of the banking market.

For those unfamiliar with the ICB, they are the idea of George Osborne, Chancellor of the Exchequer, who asked the Commission to “consider structural and related non-structural reforms to the UK banking sector to promote financial stability and competition.”

Chaired by Sir John Vickers, former Chief Economist at the Bank of England and a Director General/Chairman of the Office of Fair Trading, the ICB is due to make recommendations to the Government by the end of September 2011.

The evening I attended explored several connected issues of competition, choice and financial inclusion and it didn’t start too well I must admit as, having trailed into London, the organisers said that I wasn’t on the list.

This was after a confirmation from the organiser saying I definitely was on the list.

However, I hadn’t printed it off – no-one had! – so a small tete-a-tete ensued.

It was resolved amicably, with a clear statement that as the evening was organised as apart of government enterprises inc., it was not surprising that they couldn’t organise a drink-up in a brewery.

Or, in this case, a hearing in One Great George Street.

The panel itself consisted of several esteemed individuals:

  • Martin Taylor, Independent Banking Commissioner and former Chief Executive of Barclays Bank;
  • Martin Lewis, founder of Money Saving Expert;
  • Mark Lyonette, CEO of the Association of British Credit Unions Ltd;
  • Mike O’Connor, Chief Executive, Consumer Focus; and
  • Danielle Walker-Palmour, Director of Friends Provident Foundation .

All ably hosted by BBC Money Box presenter and former FSClub keynote, Paul Lewis.

BAnking Commission

The evening began with a poll of the 100-strong audience to see what sort of instituainots they represented.

  • 34% were members of the public;
  • 31% representatives of the industry;
  • 27% representatives of consumers or charities; and
  • 8% from the media.

The second instant poll question asked whether this audience thought it likely that they would switch their main current account within the next two years:

  • 10% said very likely;
  • 23% quite likely;
  • 53% unlikely;
  • 13% said they definitely would not change their account; and
  • 1% did not have a bank account.
  • The last one probably was a representative of the homeless charities.

This compared with Consumer Focus research of over 2,000 adults, which found only 7% had switched and 17% had considered. Just under a quarter of the general populous therefore had switched or thought of switching, compared to a third in the room last night.

The audience were then polled as to what would increase competition in the banking sector:

  • 74% voted for an easy way to compare account fees and charges;
  • 64% for a league table showing customer service levels and complaints;
  • 42% for a public campaign to promote switching accounts by consumer organisations;
  • 26% for an annual reminder of how easy it is to switch; and
  • 20% for none of the above.

This is a bit strange as websites like MoneySupermarket and MoneySavingExpert provide the number one above and have done for a while, and yet folks still don’t switch.


The second item is also not going to increase competition as I often blog about league tables showing service levels and complains. There are loads out there.

So I’m sorry but that question was just bosh.

On to the next one: what would help low income customers the most?

  • 66% voted for clear and easy charging structures;
  • 60% for more financial education in schools;
  • 58% for a facility to opt-out of unauthorised overdraft charges by not letting the customer go overdrawn;
  • 52% for access to more affordable credit; and
  • 38% for more outreach by banks to these people.

Hmmm … I’d have thought money would help them the most.

Finally, the audience were asked how much they would be willing to pay to have bank accounts with fair and transparent charging if you are overdrawn.

  • 30% said nothing
  • 14% £1 per month
  • 30% £5 per month
  • 20% £10 per month
  • 6% more than £10 per month

I wasn’t sure how useful these questions were, but some of the answers did interest, as in a quarter of customers would be happy to pay £10 or more a month for a transparent charging structure.

Funnily enough, I pay about £20 per month for an account that lets me go overdrawn as much as I want with no fees. That suits me as I don’t have to worry about my account balance. Some may say that’s a lot, but there’s all sorts of other account perks, such as travel and gadget insurances for free, concierge services, direct access to a relationship manager, etc.

My bank calls this: ‘Private Banking’.

I call it: ‘Painfree Banking’, because I don’t have to worry about my account.

Ah well, guess I’m in their sought after category rather than being some low-income underbanked and can’t afford such accounts … who then get merrily stiffed with charges.

I say the latter as the polling led to a debate that pretty much had the theme: how come banks allow painfree banking for the rich whilst stiffing the poor.

For example, when discussing why consumers don’t switch accounts, Martin Lewis suggested taht it is because the current account is the most service oriented of all bank products, but that it is subsidised by the banks cross-selling higher margin and fee-based products once they have the customer onboard.

Not quoting Martin accurately, but his view went something like: “Apathy, ignorance and inertia delivery most of the bank profits and it is a disgusting disgrace that we don’t have financial education in schools to overcome this.”

As you can see, it sets the tone for Mr. Moneysavingexpert.com.  In fact, he went further to state that any system that gave free services to the rich whilst charging the poor to subsidise them, had to be wrong.

This set the tone for the evening and rather than being a nice discussion that was balanced, it felt far more like a bank bashing session from consumerists and the public if you ask me.

For example, Danielle went next.

Now she was far more considered by comparison, and focused upon financial inclusion, stating that 1.5 million adults in the UK have no bank account today, although six out of ten had one once before.

Part of this is because of the hidden charging structure which, by nature, attracts those with money whilst punishing those without. For example, the average savings on bills when paid by direct debits amounts to over £250 per year, but you need to have a house, electricity, telephone etc, to get those savings. Otherwise, the average charges on an account each year is £140, and that’s where the underbanked get stung.

This concurred with Martin’s point, but was articulated slightly less emotionally and more rationally.

Paul Lewis emphasised that the issue is more to do with the introduction of free banking in the UK in the 1970s which, forty years later, has led to a system where “they give you gifts to attract you in, and then sell you everything at very high profit margins to rake it back”.

Martin Taylor admitted that “in private, many senior bankers would love to move away from the free banking and charging model, but not of them has the courage to be the first to change it.”

He also underlined that when free banking was introduced in the UK, it was because the average fees paid were £100 per year. Then interest rates rose and banks could reduce these fees. By the time free banking came into play, banks were trying to compete in an interest rate environment at 17% and fees had become a barrier to gaining business.

Now that’s changed, and if anyone had predicted that banks would be offering free banking when interest rates were 0.5% forty years later would have left those 1970s bankers incredulous.

Bearing in mind that he was Chief Executive in the 1990s, he knows what he’s talking about.

A member of the public then said: “what we need is a whole new banking system, rather than propping up one that doesn’t work.”

Danielle then brought the subject back around to the unbanked and underbanked, stating that low income groups purely want to have control over their money. For example, many are reliant on payments from the government or from a partner and, if those payments arrive late which is out of their control, they don’t want to get high charges for someone else’s forgetfulness, which is what happens today.

Equally, when they want to borrow money, they usually only want £50, £100 or £200. Banks don’t cater for those needs, as they want to lend £1,000 or more. Therefore, there is mismatch in the system.

I thought that was a very good point.

Paul Lewis suggested that control was hard because electronic payments make it so easy for money to flow in and out of your account that you can’t keep up with it.

Martin Lewis countered by saying that electronic actually gives you more control over your money, as mobile and internet allows you to check 24*7 what’s happening.

Paul countered by saying that most low-income families don’t have mobiles or access to the internet.

Personally, I think Paul doesn’t realise that many low-income families have a mobile today.

Mike O’Connor chipped in that low income communities are meant to be served by Post Office Banking, which is not providing access to a bank through a Post Office but actually have a state-owned and run Post Office Bank.

And Mark Lyonette of the Credit Unions, said that it was clear that Credit Unions worked for these communities with half of Northern Ireland’s citizens having a Credit Union account (450,000 accounts), and 5% of Scotland of which 20% are in Glasgow.

As you can see, the conversation was wide-ranging and, although structured, felt fairly inconclusive to be honest.

It was more of a talk shop than anything which showed a conclusion.

Having said that, I walked away with a few observations.

First, the traditional banks serve those who have money well. For those who want flexible banking, we are willing to pay a monthly fee and it gives us painfree banking.

It may be subsidised by those who pay high fees and charges, but those are the people who are often just messy with their money, according to Martin Lewis, rather than structured and in control.

Second, for those in low income communities who are unbanked or underbanked, it is because banks don’t want them. The question then is why force banks to look after them? We need alternatives instead, and if those alternatives are credit unions or the post office, all well and good.

Third, if we want more bank competition, we need to make it easier to open a new bank. I’ve blogged often about how difficult that is and it’s getting no easier. If anything it’s tougher.

Finally, there is a big dichotomy between big banks and small banks. Most consumers don’t trust small banks, even though they give better service. This is why credit unions and building societies are generally small, apart for the one exception of the Nationwide. So small banks should focus upon community, including low income communities, and service. Big banks are trusted that they won’t fail and provide the hygiene services of transaction banking. That’s all most people want, safe and secure transactions. Simple.

Meanwhile, I did learn two other things at the event.

One from Metro Bank, our favourite new bank, is that 68% of Londoners and 32% of Brits have heard of Metro Bank … not bad for a bank with four branches. Oh, and don’t be too smug about their size, they just got £52 million in new funding secured yesterday to expand to 18 branches by 2012, six more than the original target.

And Vernon Hill, founder of Metro Bank, was reported as saying to the Treasury Select Committee yesterday that the standard of retail banking in the UK is "shocking" and run by a concentrated group that apparently believes "you have to deliver bad service to make money".

He’s out to change that. Bearing in mind he achieved that objective in one of the hardest markets to crack – the USA – I think he’ll achieve something here.

Second, there is a new bank in Britain that I had not heard of before: the Secure Trust Bank.

Secure Trust Bank offers a current account that requires no credit checks, KYC or AML for the account opening.



It’s a prepaid bank account.

Secure Trust Bank

“The Prepaid Basic Bank Account comes with a prepaid card. Simply retain sufficient funds in your account to cover your regular commitments and outgoings. The rest can be transferred onto your Prepaid MasterCard for you to use as you would a debit card, at over 28 million outlets, any cash machine, retail outlets and for shopping online or over the phone. You can vary the amount that you transfer to your card at any time – online or by our automated telephone service, 24 hours a day, 7 days a week.”

Perfect for the underbanked, unbanked … and those who want to anonymously gamble, buy porn and do other crap over the internet.

So there’s some competition in UK banking out there after all!


About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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  • There is more competition out there than most people are aware of. Handelsbank, the Swedish Bank, has been quietly opening branches across the UK where the branch manager acts as the old bank manager and is empowered to make decisions. They, not surprisingly, have prize winning customer satisfaction. http://www.itsafinancialworld.net/2010/11/money-money-money-swedish-bankers-in.html

  • When Martin Lewis and others talk about the rich being subsidised by the less well off when it comes to ‘free banking’, they never take into account the way that the better off pay the banks through having large balances in their current accounts and either not receiving any interest or microscopic interest on their accounts. The banks do not only make money from overdraft charges, a large amount is made simply from static money sitting in low interest accounts. The reality is that today we don’t have free banking, what we have is opaque banking and most people would rather have it that way then paying specific fees for every transaction.