Fitch: CMA Remedies Could Mean Slow Profit Erosion at UK Banks
The remedies hinge on using technology to ensure that customers get the best deal, implying a loss of revenue for the banks. For example, several of the CMA's remedies are directed at making sure customers can either reduce or avoid overdraft charges, which the CMA says bring in one-third of total revenue generated by retail banking activities in the UK.
UK current account holders are already able to 'switch' their account between banks in seven days by using the Current Account Switch Service (CASS), in place since September 2013. CASS was set up by the UK government to improve competition, but switching rates remain relatively low. In 2015, only around one million customers, equivalent to 3% of current account holders, used CASS.
Data from BACS indicates that some banks that have featured in the 'Best Buy' tables for deposits have seen significant inflows of accounts from the switching service, notably Santander UK, which until recently was offering an interest rate of 3% on its 123 account. This suggests customers tend to switch to accounts that pay better, eroding bank profitability.
CMA research indicates that many customers do not believe they would see much benefit from moving banks and/or are relatively satisfied with their bank. On the other hand, some banks are gaining new customers by offering incentives, while losing existing customers who provide them with free funds. There is no detailed breakdown, but indications are that even if banks do not lose customers on a net basis, they are gaining customers at a cost.
But provided customers adapt, agree to share information and become more comfortable with using mobile telephone apps to conduct their financial transactions, the CMA's plans to develop an open Application Programming Interface (API) standard could stimulate competition among banks and improve customers' ability to compare service levels. A survey conducted by the British Bankers' Association found that usage of apps is far higher than internet banking for a growing number of customers, suggesting that customers might be open to the CMA's new ideas.
Lenders will also be able to use information shared by SMEs to conduct their own credit analysis of the companies and this could result in cheaper loans and services for small businesses. Competition for business loans is low in the UK, with 90% of SMEs getting their loans from their main bank.
The structure of the UK banking sector - dominated by a small number of large banks - means that it will likely take time before the CMA initiative affects pricing and profitability. Performance indicators reported by UK banks compare favourably to those of EU peers operating in highly fragmented markets, such as Germany.
The CMA says that the ability to share transaction data should be up and running by early 2018. Developing the API is complex and expensive - the report highlights estimates of between GBP2bn and GBP10bn. The timetable could slip, but the introduction of initiatives likely to reduce profitability at larger UK banks adds to pressure on net interest margins, which are likely to be squeezed by low base rates.
If the CMA remedies do contribute to an erosion of profitability reported by UK banks over time, this could be credit negative for the sector because it would reduce banks' ability to generate internal capital.
The CMA report was published on 9 August.