British people change their spouses more often than their bank accounts, the old joke runs. Happily for the big four U.K. High Street banks, a ruling today from the country's competition watchdog means their customers will remain as faithful as ever.
The decision to let Barclays, HSBC, Lloyds and Royal Bank of Scotland keep offering free checking accounts to customers in credit will do nothing to loosen their stranglehold on retail banking. That's bad news for so-called challenger banks such as Virgin Money and TSB, which are trying to chip away at the big four's near 80 percent market share.
The Competition and Markets Authority estimates customers could save 70 pounds ($108) a year by changing bank, while those with big overdrafts could save as much as 260 pounds annually. Yet fewer than one in 50 people changed their current account provider in 2014, 57 percent of customers have been with their bank for more than a decade, and almost a third have been there for 20 years.
How can you compete in providing a service that your larger competitors give away for free to depositors? The free bit is, of course, an illusion: banks charge fees on overdrafts and try to steer customers to buy their mortgages. Profitable customers cross-subsidize the others.
Post Office Money, one of the challengers, said that free "in credit" bank accounts are systemically uncompetitive because they reinforce the dominance of the larger banks.
It's hard to tell from the numbers exactly how much the big four is benefiting. Primary current accounts in the U.K. generated £8.7 billion of revenue in 2014. Return on equity as a whole increased to 11.8% in 2014 from 7.5% in 2012, according to the regulator, although it added this was not "significantly" higher than the banks' cost of equity.
But the CMA gave up trying to work out whether the larger banks were profiteering. None of them could produce separate figures showing how much money they make from their U.K. business or personal customers, the CMA says. The banks couldn't work out how to share costs with other parts of the business. This truly stretches credulity. Does the regulator really buy the idea that Lloyds, the biggest provider of checking accounts, has no idea how profitable its U.K. customers are?
The CMA stopped short of breaking up the big four. The limited remedies it proposes will do little to hurt them: they will have to be more transparent about their charges and make it easier for small companies to switch banks. That's not going to encourage waves of customers to switch accounts. Customers still won't get a detailed monthly statement of their bank charges, and switching is still a pain thanks to the checks lenders have to carry out to ensure their customers aren't money-launderers or terrorists.
Today's report could have been the step change for challenger banks that would have let them increase their market share dramatically. Their best hope may now lie in merging with each other -- or bringing some disruptive technology to the industry. The big banks can breathe easy.
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