Will a technological "revolution" promote better competition among Britain's High Street banks?

A package of measures aimed at paving the way for an ‘open banking revolution’ have been announced by the Competition and Markets Authority (CMA).  The final report of the CMA’s retail banking market investigation, published today, concludes that older and larger banks do not have to compete hard enough for customers’ business, and smaller and newer banks find it difficult to grow. This means that many people are paying more than they should and are not benefiting from new services.

To tackle these problems, the CMA is implementing a wide-reaching package of reforms. Central to the CMA’s remedies are measures to ensure that customers benefit from technological advances and that new entrants and smaller providers are able to compete more fairly.

André Spicer is Professor of Organisational Behaviour at Cass Business School.  In 2014, he authored the Culture of British Retail Banking Report - the first comprehensive review of progress in the entire sector since the financial crisis.

Professor Spicer comments:

“Competition in UK retail banking is a bit like world peace - it would be nice if it actually existed. For a century, UK retail banking has been dominated by a small handful of large banks. There has actually been a progressively more concentration in the market over time as large players have merged. After the 2008 financial crisis there was even greater consolidation. Every decade there is a scandal which means the public get angry, legislators say 'we need more competition', and then they launch a lengthy inquiry. Inevitably these inquiries start out promising a radical overhaul but end up recommending very minor tinkering. Usually they put their faith in the power of technology and new entrants to shake up the industry. But what ends up happening is the larger players grab more power.

“Small players are snapped up by the industry behemoths and the large players in the industry use technology to actually consolidate their market share. A movement towards more online offers could actually lead to greater consolidation in the market. This is what has happened in other markets like retail (amazon) and transportation (uber) with the move online.

“What's even more interesting is that these new smaller players don't necessarily drive up standards - they can actually drive down standards. This is what happened when many non-banks entered the market in the 1980s and 1990s. These were often the institutions like Northern Rock which played it fast and loose in the lead up to the financial crisis.

“The final problem with the CMAs recommendations is they are based on a model of human behaviour that only an economist could believe. It assumes customers spend their spare time scouring the market for the best deal on banks. But the reality is that customers are not interested in trading small savings for large investments in time. They also over value short term search costs and undervalue longer term savings”.