Banks face a full investigation from the Competition and Markets Authority after the body found that “essential parts” of the system do not serve businesses and consumers.
1. The end of free banking?
The Competition and Markets Authority has said that bank charges such as overdraft fees may be “cross-subsidising” bank accounts that are free if in credit, and that offering these accounts for free “may distort competition”.
The CMA says removing “free if in credit models” may lead to greater transparency and moves towards “more cost-reflective charging structures”. In the past, banks have found other ways to make money from “free” current accounts, such as selling Payment Protection Insurance.
“It is also possible that there might be a degree of cross-subsidy in the personal current account market, which may be distortive of competition. Indeed, the ‘free if in credit’ model often involves cross-subsidy by other revenue streams for current accounts such as overdraft charges.”
However, the regulator may find it difficult to force banks to remove this, since it is likely to be deeply unpopular.
2. Break-up of the banks
The Miliband option: The Labour leader has pledged to create two new banks out of the pieces of Lloyds, RBS, Barclays, HSBC and Santander taken from them.
Analysts at Deutsche Bank have said this would “involve vast shareholder value destruction and financial waste”, pointing to the creation of Lloyds spin-off TSB, which it estimates will cost around £2.5bn for a 2-6pc share of the market.
3. Make life easier for smaller banks
This could include lowering the capital requirements for smaller, less systemically-important lenders.
As The Telegraph reported earlier this week, the Bank of England is lobbying international regulators to ease risk weights – the standardised measures of how safe loans are, which would allow smaller banks to be on a more even playing field.
However, this runs the risk of smaller, less stable banks potentially over-stretching themselves.
4. Open up data to encourage switching
More initiatives such as a recently-announced move to allow consumers to download their financial histories in order to find the best account, as well as more information on what offers are around, could be recommended.
However, it is possible that consumers are likely to see little gain from moving. As Deutsche Bank notes:
“We expect these measures to contribute to a market in which customers feel more able to switch but remain fairly un-incentivised to do so given a general lack of product differentiation, either from a product or pricing perspective.
“This lack of product differentiation is not due to an absence of innovation, rather because good ideas are copied.”
Low interest rates and money printing give banks little incentive to compete on current accounts, the analysts say:
“The liquidity provided by current accounts has probably never been less valuable than at present given QE-driven flooding of world markets”
5. Crackdown on overdraft fees
These are one of the greatest problems with the market at the moment, according to the CMA:
“In terms of overdrafts, we are concerned that consumers are not being served well by their [current accounts].
“The difficulty in comparing charging structures has arguably increased over the last two years and… consumers are not able to compare costs across providers to assess which PCA is most suitable for them.”
Many banks have altered overdraft fees in recent months, but regulators could crack down on them, for example by introducing maximum charges. However, this could prove to make bank accounts more similar than they already are.