The UK's Competition and Markets Authority has set out a series of reforms to improve competition in the retail banking and SME market, calling on banks to provide open APIs for customers to share their data and search for the best deal.
The watchdog says that at present, it is hard for bank customers to work out if they are getting good value.
"Bank charges are complicated and opaque and many customers think it is difficult and risky to change banks," says the CMA in its provisional decision on remedies to improve the market.
As a result, nearly 60% of personal customers have stayed with the same bank for over 10 years and over 90% of SMEs get their business loans from the bank where they have their current account.
This means that competitive pressures are weak, so banks do not need to work hard enough on price or quality of service, says Alasdair Smith, chair of the retail banking investigation.
"For too long, banks have been able to sit back and not work hard enough for their personal and small business customers," he says. "We believe the strong and innovative package of measures we are proposing will give customers the information and tools they really need to get a better deal out of the banks."
To transform the market the CMA believes banks instead need to be made to provide their customers with the right information so that they can easily find out which provider and type of account offers best value for them. The CMA also proposes to push the development of new online comparison tools and improve the current account switch service (CASS) to make switching banks more straightforward, but has shied away from more costly measures which would have allowed customers to keep their account number when changing banks.
Reflecting the big technological changes in banking, the CMA is proposing to require banks to "move swiftly" to introduce an Open API (application programming interface) banking standard. This standard will enable personal and SME customers to safely and securely share their unique transaction history with other banks and trusted third parties.
"This will enable bank customers to click on an app, for instance, and get comparisons tailored to their individual circumstances, directing them to the bank account which offers them the best deal," states the report.
The watchdog says it will use its powers to force banks to adopt measures proposed in February by the Government-sponsored cross-industry Open Banking Working Group. It is proposing the creation of a new entity, "funded by the banks but with an independent chair", to ensure actionable progress, withy an early 2017 deadline stipulated.
The CMA also proposes that banks should be made to regularly prompt their customers to check that they are getting good value from their banking provider, a move which the watchdog believes will lay the foundation for a major change in the retail banking sector.
Says Smith: "New entrants into a market are an important source of competition and innovation, and we are well aware of the current barriers to challenger banks in UK retail banking. What’s really holding them back is their ability to highlight to customers how new offerings compare with their current deal. Our package of banking reforms will help new competitors get a stronger foothold in a market which is of vital importance to the whole economy.
He says the full package of changes could bring benefits to bank customers to the tune of £1 billion over five years.
Read the full proposals:Download the document now 3.7 mb (PDF File)