Traffic-light bank account rating could help us stay out of the red
24 November 2015 By Benny Higgins
Maya Angelou was one of the most extraordinary women of our age. The American poet and civil rights activist, who died last year, once said: “There is a world of difference between truth and facts. Facts can obscure truth.” It is safe to assume that she wasn’t aiming her insight at UK banking, but leadership within the sector should ponder its relevance.
Over the past 15 years, we have seen several reports into competition in UK banking, all essentially asking the same question: how can we make banking better for customers? Throughout this period there have been some improvements – albeit largely as a result of interventions from financial services regulators rather than banks – but the industry has always come up short. And the central issues we face today are depressingly familiar.
The biggest problem is that the charging models for current accounts are too complex – particularly for overdrafts. The introduction of flat monthly or daily overdraft fees has created huge differences in the amounts that customers pay when they go overdrawn. And the biggest high street banks with the largest customer bases are often the worst offenders.
This complexity makes it incredibly difficult for customers to understand what they pay for their account and what they receive in return, leaving millions of customers paying more than necessary, often without knowing it.
Furthermore, because the number of customers who switch accounts is so low, the banks with large and well established customer bases have little incentive to change. And the resultant cost to customers is significant.
The Competition and Markets Authority (CMA) has declared that the average customer stands to save £70 a year by switching to the cheapest provider.
Put another way, that means that every year UK current account customers are collectively paying as much as £4bn more than they need to for their bank accounts. And it is the most vulnerable who often pay the highest price – with heavy overdraft users paying as much as £260 more per year than they should.
So what can be done?
For the past year, the CMA has been trying to identify answers to that question and in October it reported its initial findings. While these have provided a very clear assessment of the industry’s failings, the authority’s proposed remedies fall well short of the radical change required – concentrating most of its suggestions on improving the switching service.
It is unarguable that customers would welcome a more reliable, easier switching service. But we must not find refuge by placing our main focus on switching.
For many customers, the nature of the relationship with their bank is unlike that with other providers of services, such as mobile phones or utilities.
It is characterised by longer-term emotional and practical ties which, combined with the weakness of market competition, leads many customers to remain with the same bank for most of their adult life. This point is further reinforced by the most recent switching data, which shows a reduction in the number of customers changing banks.
If we really want to make a difference, we have to look beyond switching and have the courage to tackle the other issues which undermine healthy competition between banks.
There has been an ongoing public debate about whether or not bringing so-called “free banking” to an end would improve the market for customers. Given that banks generated total income of £8.7bn from current accounts in 2014, it is irrational to believe that banking is free. But we should be careful what we wish for. History would not support a belief that a market-wide emergence of monthly fees would lead to a better outcome for customers.
I believe that increasing transparency about the true costs that customers incur when using their current accounts offers the best hope of forcing banks to up their game.
The comparison service Midata will in time help customers to find the best account when they are looking to switch, but we also need to find ways to demystify the fees and charges that bank customers currently incur, so they can quickly and easily understand if the account they have is right for them.
At Tesco Bank, we have taken a number of steps to address this issue, including becoming the only bank to let our customers know when they could have earned more interest by transferring money into a savings account. We are also one of the only banks who pay credit interest to all our customers. There is, however, more that can be done.
That is why we have called on the CMA to mandate banks to adopt a standardised labelling approach for current accounts, using a traffic light colour-coding system to make it clear to customers both the cost of their account, and how it compares with others in the market.
The combination of colour-coded labelling with nutritional information has been used successfully in the grocery industry to both help customers have a better understanding of the choices they are making, while also providing a strong impetus to the reduction of salt and saturated fat levels in many foods and drinks.
I can’t see why such a measure could not be adopted in the current account market. As well as empowering customers, it would create a strong incentive for banks to treat them well. Implementing such a measure would require industry-wide collaboration with a firm hand from regulators. But if banks are offering good value, then surely they have nothing to hide?
The complexity in current account charging has obscured the truth for current account customers for too long. The CMA has a golden opportunity to rectify that and in doing so can make a huge difference to millions of customers.
The key to preventing facts obscuring the truth for customers lies in transparency. It’s time to take transparency seriously.