Avoiding The Dire Strait of Retail Banking

So, competition in banking has worsened, according to research cited by the FT this week, and Which? is back on the warpath against "complicated and exorbitant" unauthorised overdraft charges.

Accenture's research found that in 2011 only 11% of customers switched at least one product and only 6% switched their current account - and 90% of us "had no desire to change providers". 

Financial services consultancy Oliver Wyman chipped in with this gem:

"if [banks] made their charging structures completely transparent, no one would want to pay them."

Forrester, the research firm, found that less than 25% of UK customers thought "their bank put their interests above the desire to generate profits."

Yet more reasons for levelling the playing field between banks and alternative finance models.

Government to End Bank Charges Litigation?

With the government now such a significant shareholder in so many UK current account providers, it could save taxpayer's money and boost the (alleged) victims' finances by requiring an end to the expensive saga of bank charges litigation, and the refund of fees that the OFT alleges are excessive.

Note the finding by Mr Justice Smith (at para 415) that "information provided by the Banks suggests that in 2006 [alone] the Banks between them received £2.5 billion from Relevant Charges on an average daily unarranged overdraft balance of £0.6 billion."

Another judgment in the saga is due tomorrow morning (21 January 2009) at 10 a.m.

Update: the 21 January judgment held that only certain NatWest terms are capable of being a penalty. Whether or not they do constitute a penalty is phase two of the saga, and phase one is yet to conclude.

Phase one is held up because the banks appealed the first instance decision that both their current terms and their historic terms are capable of being assessed for fairness under the Unfair Terms in Consumer Contract Regulations. Judgment on the current terms is expected soon, whereupon the banks' appeal in relation to the historic terms will begin.

Of course, the Court of Appeal's decision on both sets of terms could go to the House of Lords, meaning several years' further delay.

Meanwhile, the lower courts won't hear cases pending the outcome of the higher court proceedings. And the Financial Services Authority is also preventing anyone getting their money back via the banks' own complaints procedures. Similarly, the Financial Ombudsman Service (where complaints to the banks utlimately go) won't process complaints until the court proceedings are over.

This is no way to treat the nation's consumers, especially when the consumers' own watchdog is involved.

If the banks won't act fairly on their own initiative, then it must be part of the government's "fiscal stimulus" package, to insist that all banks that took bail-out money immediately refund the element of bank charges which the OFT has complained are excessive.

Time is Right to Innovate in Retail Financial Services

Two reports this week confirm it for me.

The first was from MoneyExpert.com, as reported in the FT:

"Since the revised banking code made it easier for customers to change their current account provider in 2005, more customers have taken advantage of the option. Over a six-month period to the end of October 2007, the number of clients changing provider rose from 1.8m to 2.3m. “The switching index shows that around 300,000 people a month are choosing to change their current account provider, and overdraft facilities are an important component for choosing an account,” said Sean Gardner, chief executive of MoneyExpert.com."

... Customer dissatisfaction over bank overdraft fees, as well as concerns over financial security prompted by the problems of Northern Rock, have accelerated the number of switches made recently, according to Mike Naylor at personal finance website uSwitch.com."

The second was from the Bank of England, to the effect that unsecured lending to households and small businesses is suffering a large reduction, and spreads between savings and unsecured lending have widened and are likely to widen further during Q1 2008. In other words, banks are helping themselves to more of consumers' cash as a result of their exposure to the credit crunch.

So, customers are adjusting to recent banking shocks and making alternative arrangements. And, while the banks need to offer incentives to retain or attract those customers, their hands are tied when it comes to anything really substantial.

The timing is great for innovation and new entrants to the retail financial services marketplace.

Yet the key to how retail financial services should develop is how consumers actually view and use money. Today's products and infrastructure are generally designed to suit the banks and other product providers, and they are ill-equipped to innovate from the consumer's standpoint. I reiterate my November prediction for 2008. And for my money, the essential characteristics of Financial Services 2.0 will mean that banks retreat from "owning" customer relationships to back-office service provision.

PS 7 Jan '08: First Direct's recent offer of simply paying people £100 to switch current accounts and receive the same old products, underlines the lack of real innovation amongst retail banks. Note the requirement to take an extra product or maintain a balance of £1500 in a nil interest account in order to avoid a £10 a month fee. The only real competition amongst retail banks is in the size of their marketing budgets.

PPS 21 Jan '08: The proportion of Britons still getting their financial advice from high street banks has declined from 28% in 2003 to just 4%.