Banks have been told they must take part in an "Open Banking revolution" and allow customers to manage their accounts with multiple providers through a single digital app by early 2018, as part of a package of measures designed to "shake up retail banking for years to come".
The Competition and Markets Authority (CMA) this morning published its final report on the retail banking market, setting out the changes it believes are necessary to make it easier for customers to switch to a better deal.
Other requirements include banks setting their own monthly caps on unarranged overdraft fees, an improved bank switching process and an overhaul of the Current Account Switch Service (CASS).
Technology is at the heart of the CMA's plans. There's a requirement that banks must have the 'Open Banking' initiative up and running within two years. This means banks must ensure that customers' data can be shared securely with other banks and third parties, to allow customers to manage multiple accounts via one app, and so have more control of their cash.
The CMA found that older and larger banks don't have to compete hard enough for customers' business, and smaller and newer banks find it difficult to grow. As a result many customers are paying more than they should and are not benefiting from new services.
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How will 'Open Banking' work?
The CMA's provisional findings in May suggested that banks should be made to share customers' data – and data-sharing is a key focus of today's report. Here's how it will work:
- Banks will be required to share data using 'application programming interface' (API) technology. Put simply, APIs allow the sharing of people's information, for example on location or preferences – this kind of technology is already widely used by the likes of Facebook, Google Maps and Uber. In banking, APIs can be used to share information such as the location of bank branches and the prices and terms of banking products.
The CMA believes Open Banking will "significantly increase competition between banks", by making it much easier for customers to compare what is offered by different banks via a phone-based app.
- You'll have to opt in to share your data. It's important to note that Open Banking operates on an 'opt-in' basis, meaning customers must first be satisfied about privacy and security safeguards.
Once you've given consent to share your data securely, your transaction data will be shared with intermediaries, which can offer advice tailored to the individual customer. This is expected to make it easier for customers to identify the best products for their needs.
- Security will be prioritised. To ensure enough time is available to work through the important issues associated with customers' data security and redress, the CMA is requiring banks to release the least sensitive information – about prices, terms and conditions and branch location – first.
This will be done by the end of March 2017. It is expected that all aspects of Open Banking will be up and running by early 2018 at the latest.
Cap on unarranged overdraft fees
The CMA report also focuses on how to help those who often find themselves with unarranged overdrafts – around 25% of all personal current account customers. The report says banks make £1.2 billion a year from unarranged overdraft changes.
- From July 2017 banks will have to set a maximum monthly charge for unarranged overdrafts, and tell customers about it. This maximum charge will cover all unarranged overdraft charges including debit interest and unpaid item fees.
- The CMA considered setting an upper limit for this maximum overdraft charge but decided not to do so, arguing that having the charge set by the banks rather than the regulator will mean banks themselves remain accountable for their overdraft charges.
- From January 2018 banks will also be required to provide overdraft alerts and grace periods for customers who've slipped into an unarranged overdraft.
- Research by regulator the Financial Conduct Authority has shown that this kind of alert, when combined with mobile banking, can significantly reduce overdraft charges.
Other key requirements
The CMA's wide-ranging report also calls for:
- An improved account opening and switching process. The CMA found customers fear switching current accounts is difficult and time-consuming, and worry that something might go wrong. So it's requiring improvements to specific aspects of the switching process, with a longer period of redirection of transactions from the old to the new account (currently set at three years).
The CMA's report also laid the foundations for a "long-term" promotional campaign to encourage more switching.
- Overhaul for the CASS. While the CMA found that CASS has "made a positive difference to the switching process and is generally working well", it found that many customers do not know about it or do not have confidence in it.
The CMA is therefore requiring the governance of CASS to be strengthened and have it overseen by a regulator, in a bid to improve customer confidence.
- Better information for small business owners. The CMA found small businesses lack online tools that provide comprehensive information about bank charges, service quality and credit availability.
The CMA thinks small business owners would be best served by tools that provide a 'one-stop-shop', allowing them to quickly and reliably compare banks on price, service quality and lending criteria across the whole range of providers. With that in mind it's ordering large banks to develop comparison services for small businesses from March 2017.
'Glimmer of hope for competition'
Guy Anker, managing editor of MoneySavingExpert.com, says: "People simply aren't switching enough due to the perceived hassle – just 3% per year do so – despite the introduction of seven working-day switching in September 2013, meaning many put up with shoddy service and high fees. The industry needs to break the disjoin between the perception and reality. Most of those who do switch says it's hassle-free.
"With seven-day switching also came the guarantee that payments in or out will come from the new account if wrongly requested from the old one. What's more, for those in credit there are healthy incentives to switch such as free bribes to do so.
"Some of the remedies today are merely tinkering at the surface, such as the overdraft charge cap, as these may help people with their current bank but won't necessarily improve switching rates.
"The glimmer of hope for competition is the data solution whereby banks will be forced to provide data so people can see all their accounts on one app, and be able to find the best account for them via a comparison based on their own requirements.
"That said, this has been tried in the past and banks provided completely unworkable data. That data belongs to the customer – banks must get it right this time."
CMA claims it's 'breaking down barriers'
Alasdair Smith, chair of the CMA's retail banking investigation, says: "The reforms we have announced today will shake up retail banking for years to come, and ensure that both personal customers and small businesses get a better deal from their banks.
"We are breaking down the barriers which have made it too easy for established banks to hold on to their customers. Our reforms will increase innovation and competition in a sector whose performance is crucial for the UK economy.
"Our central reform is the Open Banking programme to harness the technological changes which we have seen transform other markets. We want customers to be able to access new and innovative apps which will tailor services, information and advice to their individual needs.
"This is backed up by a wide package of measures to improve the current account switching service, to make it easier for small businesses to shop around and open new accounts or get a loan, and to see how the quality of service provided by your bank compares with other providers.
"We are also taking measures to give customers much greater control over their overdraft charges, so that they are clearly told when they are about to be incurred and have an opportunity to avoid them. Alongside this, banks will have to cap their monthly charges for unarranged overdrafts."
What happens next?
The CMA will now focus on putting in place the remedies announced today, working with others whose role it is to make individual remedies happen, such as the Treasury and the Financial Conduct Authority.
A list of the CMA's main remedies and the various start dates is available online.