The State of Banking in the UK: How to Make it More Competitive

The UK banking market has been under scrutiny in recent years, with many calling for greater competition to reduce the profits of the big four banks. However, a recent report by the Commerce Commission has highlighted the need for customers to be easily able and willing to switch between banks in order for competition to be effective.

The Current State of Banking in the UK

The four Australian banks operating in New Zealand made approximately NZ$7.1 billion in profit in 2023, representing $1,400 per person. Despite many customers struggling due to increasing mortgage costs, the banks’ profits rose. This has led to concerns about the lack of true competition in the market, with Kiwibank under-capitalised and the slow rollout of open banking.

Image: Banking in the UK

The Hurdles to Changing Banks

One barrier to competition is consumer disengagement. This results in many people staying with their bank despite being charged more than those shopping around. The commission’s report notes 54% of customers have never switched banks.

The report identifies several issues that result in customers being “sticky” and disinclined to switch banks, including how difficult it can be to find the best deal. For example, the advertised mortgage interest rate can differ from the rate you are ultimately offered. Customers must go through the mortgage application process to get a definitive rate. This is a time-consuming process that limits their incentive to shop around.

Additionally, switching banks can become a long and onerous task involving changes to automatic payments, and notifying your employer and every organisation you have financial interactions with.

The Promise and Reality of Open Banking

Open banking allows access to banking and transaction data via third-party service providers. New Zealand has lagged behind other countries in establishing open banking systems.

Open banking allows users to aggregate multiple bank accounts within one app, and allows lenders to directly access a person’s financial information. There is the potential for open banking apps to compare products and services from different banks using a person’s own data, making shopping around considerably easier.

Image: Open banking

Greater Transparency

If the government wants to address bank profitability, it needs to enable and encourage people to change banks. So, how can this be achieved?

Firstly, information needs to be more clearly available and understandable. Advertised mortgage rates and cash back incentives, for example, are often less attractive than the rate offered at the end of the application process.

But a prospective client is unable to find that out until they have invested time and effort applying.

Secondly, the government needs to make the process of changing banks easier. Some countries have implemented systems to reduce the time and pain associated with switching accounts, such as Australia’s New Payments Program or the UK’s Current Account Switch Service.

Finally, the government needs to accelerate the adoption of open banking. This will allow consumers to centralise their financial data and to apply for different banks’ products (such as savings, credit cards and mortgages) from a single platform.

The Rise of Holiday Let Deals

The choice of holiday let deals is on the rise. According to analysis by Moneyfacts, compare the mortgage choices for borrowers looking at holiday lets have increased to 445 options, up from 362 seen in August 2023. There are currently 34 different lenders within this market, two more than in August 2023, the majority of which are building societies.

Image: Holiday lets

Conclusion

The UK banking market is in need of greater competition to reduce the profits of the big four banks. However, this can only be achieved if customers are easily able and willing to switch between banks. The government needs to enable and encourage people to change banks by making information more clearly available and understandable, making the process of changing banks easier, and accelerating the adoption of open banking.