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IDC Lawrence Freeborn

Lawrence Freeborn                                 
Research Manager, Financial Insights
Read full bio   @IDCLawrence

I’ve written before about the UK government’s attempts to gin up the country’s current account market by prodding consumers to take more interest in their money management. Now the Competition and Markets Authority (CMA) has published more recommendations on how to improve the current account space for consumers and small businesses.

At the start of the CMA’s investigation, in 2014, it seemed that there was a threat to the concept of free in-credit banking enjoyed by consumers in the UK. Looking at the CMA’s report, released yesterday, it appears that free in-credit banking (i.e. if you stay in credit, you won’t have to pay your bank any fees on a day to day basis) will survive for the moment, but it’s worth repeating why this remains divisive.

In a nutshell, banks can continue to offer free in-credit lending in part because of the fees they recoup from overdrafts and, more pertinently, unarranged overdrafts (where there is no pre-agreed overdraft in place). The 25% of consumers who use unarranged overdrafts are, roughly, those users who are least able to pay for those overdrafts: the £1.2 billion the UK banks earn from unarranged overdrafts each year goes a long way to subsidizing the free in-credit banking for everyone who don’t use them, not to mention the smaller minority who take an almost professional interest in the switching offers and loss-leading products of the established banks (which, not coincidentally, challenger banks find difficult to compete with), earning fortunes in the process.

The upshot of all this is that some commentators wanted to see a legal cap on the fees banks can charge for unarranged overdrafts. As they saw it, this would be tilting the balance of benefits away from those consumers with the broadest shoulders and towards those who struggle to make ends meet. But the CMA shrunk from this recommendation. The measures aimed at small business banking, restricted to improving transparency of costs and fees, also left some underwhelmed.

However, I think it is too early to write off the changes the CMA wants to see. On the contrary, they could prove more radical than is currently understood.

The PFM mandate

Anyone who has been tracking regulation of the UK banking market for a while should not be surprised. The CMA appears to have been captured not so much by a secret cabal of its own enemies as by the minority of technologically savvy, footloose and activist consumers. Because the main takeaways from the CMA report, as from earlier initiatives such as MiData, are that the government is not so interested in sweeping supply-side reforms like breaking up the banks, as in encouraging people to look after their interests more assiduously.

Specifically, what we will have by 2018 is a new type of mobile banking app. This app will provide a single digital portal which can integrate data from all customers’ banking relationships, the idea being that consumers can then organize their budgets, avoid any overdraft fees, ease their cash flow and maximize their returns.

In practice, this is the government telling the industry that PFM (or personal financial management) applications must become the norm by 2018. But the interesting thing is that PFM applications have been around for a long time. Websites such as Mint and Wesabe created a buzz a few years ago before fizzling out in the UK, and now there are a few third party attempts to create similar services on the mobile platform from the likes of Money Dashboard. PFM functionality is an increasingly important part of mobile banking software but generally lacks the cross-bank account aggregation aspect, severely weakening its value. However, First Direct (the direct banking service of HSBC which targets well off consumers) has offered an account aggregation platform for a few years, without much impact. So PFM remains a niche activity.

More radical than it looks?

The 2018 incarnation should improve on current offerings because, in line with the third party access to bank account information which is a prominent part of the EU’s second Payment Services Directive (PSD2), it will take advantage of secure third party data integration based on APIs, and ideally secure authentication as well, unlike the combination of screen-scraping and storing bank logins which current PFM offerings rely on.

This is something the incumbent banks will have to get used to. As well as being forced to build the APIs to support this new type of digital portal and the third party access of PSD2, they will need to rethink their customer service propositions in the light of these changes. Lots of our thinking at IDC is currently around the extent to which banks will be able to continue to own their relationships with customers going forwards. Whereas the likes of Google are not set up to lend to or take deposits from their users, they could very well provide a compelling money management portal if they have legally mandated, secure access to their users’ banking information, which they can combine with all the other information they already hold.

Can banks compete with this type of service head on, or will they be forced to focus on optimizing their balance sheets, risk management and compliance processes to compete through portals they no longer control? Although some have been disappointed by the scope of the recommendations, they could finally presage the scale of digital disruption which has happened to so many industries, but which, until now, banks have generally been able to control.

For more information on Financial Insights, please contact Lawrence Freeborn. If you also want to know the economic implications Brexit can bring to the banking industry, take a look at our 35-page report on the impact of Brexit on the UK as well as European IT spend available: The Brexit Impact on IT Spend in the U.K. and Western Europe: A Scenario Analysis. The report outlines the scenarios in more detail, the associated assumptions as well as the expected impact on hardware, software and services for each of the scenarios. If interested, please click here for more information.