The current account market shows signs of not treating its customers fairly, the Office of Fair Trading has said in a report released today about the industry.
Due to a combination of "complexity" in the market and "a lack of transparency", the personal current account (PCA) market is "not working well for consumers" the OFT's report Personal Current Accounts in the UK – A Market Study
These factors mean that customers, and therefore competition within the market, are driven exclusively by those fees which are visible, despite the fact that other less visible elements such as charges for insufficient funds and foregone interest make up the majority of banks' revenues.
The OFT found that while the current accounts
market is relatively competitive, a large proportion of current account customers believe that it is difficult and potentially dangerous to switch banks, resulting in very low switching rates. Furthermore, those that do switch usually only do so as a result of an unsatisfactory experience with their current provider, not because a better deal exists elsewhere.
Due to these factors, the OFT believes that the market has become unable to function well, that it is "in an equilibrium that does not work well for many consumers." Because, without sufficient competition, the banks have no incentive to improve the way that PCAs operate, they are less inclined to create new and innovative financial services within the banking sector.
Ninety per cent of consumers use PCAs on a regular basis, for transferring money, having salaries and benefits paid to them, and organising their finances. The most common type of account is what has become known as the 'free-if-in-credit' account, where no fees are charged providing the customer remains within the terms and conditions of their account, without exceeding their agreed overdraft limit.
However, the account ceases to be 'free' when the consumer racks up overdraft charges, and they are also losing out on interest which they could have accrued for being in credit with another bank. More than one in five customers were unaware of these fees until they incurred one.
The report found that 88 per cent of PCAs offer less than 0.5 per cent interest on accounts in credit, while for the banks, current accounts represent 31 per cent of revenue – more than savings accounts
and credit cards combined.
Not only does the vast majority of the British population have a current account, but the banks then use this to sell other financial products, relying heavily on the fact that many consumers prefer to have all of their financial services with just one bank, instead of shopping around for the best deal.
The OFT is driving for a current account market which benefits consumers more, one which is transparent and competitive enough to achieve higher switching rates, which the OFT believes is the "best outcome".
"Personal current accounts are a vital gateway to effective participation in the economy." said John Fingleton, OFT chief executive. "But this market is not serving consumers well.
"Customers lack the information they need to choose the best deal, and this in turn weakens the banks' incentives to compete. There is much the banks could do to improve how the market works, and we hope this report will encourage them to take steps to do so in the near future."
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