The endowment of free current accounts to the public is a central cause of the dearth in competition within the lending sector and is obstructing smaller lenders from entering the market, according to recent allegations from by Tesco Bank and Virgin Money.
The two so called ëchallengerí banks have told the Competition & Markets Authority (CMA) that in offering free current accounts, the so-called ëBig Fourí banks are able to dupe existing consumers through the levying of unwarranted charges on their current policies which in effect fund the incentivising strategies deployed to lull new customers in.
As such, they are leading a movement to compel banks to demand monthly fees of current account holders.
The ëBig Fourí banks are RBS, HSBC, Barclays and Lloyds and between them they consume 77% of the current account market. Although recent measures, such as the government backed switching service, have inspired growth in the number of people seeking to switch provider, both Tescos and Virgin believe more radical measures are needed.
Tesco noted that due to the cost-free nature of their current account, the majority of customers werenít scrutinising the steadily decreasing lack of value being afforded to them through their present providers. They also noted that any other institutions seeking to enter the current account market find the going intensely difficult and must ëconform in order to competeí.
Virgin reinforced this viewpoint castigating the nature of big banksí provision of current accounts, inferring that these are presented as cost-free, whilst in fact they are an apt way for large banking institutions to leverage deliberately obscured overdraft charges and generally mask other fees.
The general mis-representation of information by the ëBig Fourí banks has been a recurring problem remarked upon by consumer groups and critics of the banking sector, with the vagueness that results from this practice disenfranchising consumers and preventing them from actively engaging in a switching process.
Virgin and Tesco have long insinuated their intent to end this culture of saver apathy, which many believe stems from individuals simply believing all lenders are as bad as one another. Through the imposing of obligatory charges on consumers, banks would enable savers to would feel more comfortable with asking exactly what theyíre receiving for their cash, and in turn this could spark a culture of more knowledgeable, engaged savers.
A spokesman for Tesco underpinned this perspective, asserting: ëTo encourage competition, it needs to be much easier for customers to see if their bank is really giving them a good deal, or if their ìfreeî account is, in fact, extremely costly.í
Lloyds stated: ìThe model is highly valued by many customers.î
ìCustomers already have a wide choice of packaged accounts, which typically have a monthly feeî on top of the free accounts.î
However, Barclays has gone against the grain as far as its other ëBig Fourí lenders are concerned releasing a statement saying: ìAs standard current accounts in the UK are free, consumers may have less of an incentive to spend time evaluating their choice of provider compared to energy, mobile phone contracts and mortgages, for example.î
ìArguably, if accounts incurred a flat monthly fee or transactional charges there may be more opportunity for providers to differentiate their offerings.î
However, if compulsory charges are applied to current accounts, despite their potential competition-enhancing ramifications, it is farfetched to think that consumers will ever welcome an extra charge from lenders despite the hypothetical long term ramifications.
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