Today the competition regulator has revealed plans to fix the current account market. The proposed remedies have been shot down as ineffective by many commentators. I disagree with them – this intervention is the first in a long time that feels like a big step in the right direction.
The UK regulators have a bit of a reputation for being toothless, rightly. A recent investigation into the credit card market showed all the signs of a whitewash, concluding competition was working “reasonably well”, despite also finding evidence of six million people with problematic credit card debt. People with severe card debts are actively discouraged from applying for a more appropriate card in fear of damaging their credit rating further, assuming they can work out what that better option might be.
Similarly, a recent investigation into the energy market highlighted severe problems, before proposing some very minor interventions. One soon to be implemented change is a price cap that will save people who use prepaid meters £75 a year. That’s absolutely pathetic when the same regulator found even the best prepaid deals cost £300 more each year than comparable direct-debit options during its enquiry.
So why am I optimistic about the latest intervention in the current account market? In a nutshell, this time the proposed changes might actually lead to a change in behaviour.
Just 3% of people switch current account each year. That’s practically no one, even when compared to other financial products and utilities, where switching is universally low. Some say the reasons for this lack of switching are complex. They are not. People don’t switch because it’s a pain in the backside. Every other factor is marginal.
Sure, identifying the right account can be very difficult when companies deliberately hide their most lucrative fees and charges in the small print. And yes, doubtless some people get cold feet because they worry something could go wrong.
But the reality is even when people do know what they should be doing, the slightest hassle can waylay the best made plans. The key to encouraging people to act differently, be that shopping around for a new energy tariff, insurance policy or bank account, is to make it easy for them to do so.
Businesses already know this. Last year I met with a Fintech company that astonished me by revealing just 2% of online shopping baskets on mobile devices complete. The vast majority of people either give up when they’re asked to fill out the umpteenth form, or if they lose their internet connection, or if a particularly excitable squirrel passes by the window. Since then, the arrival of payment apps like Apple Pay, Android Pay, and the growth of the more-established PayPal, have made making purchases online easier – and that’s led to bigger profits for companies that sell online.
In more extreme cases businesses actively rely on our inertia. To pick one example, it’s not unusual for insurers to sell policies at a loss in the first year, banking on enough consumers not moving away when the price gets hiked after a year. Or think of the countless “free trials” that bump you onto a rolling monthly subscription if you don’t cancel the policy. It’s no harder to give people the free trial and let them opt into the subscription – but our “inertia bias”, to use the term of behavioural psychologists, means that approach is completely unprofitable.
What’s more, the regulator knows it too. A little known Financial Services Authority (the precursor to the current financial regulator, the Financial Conduct Authority) report laid these truths out in 2008 in an unusually frank thought piece. The gist of the article is that financial education will only work if it gives consumers the information they need to make an informed decision, and changes their behaviour so they act on it. Unfortunately, most programmes are quite good at the former, but terrible at the latter.
Unusually, the proposed intervention in the current account market seems to take these issues on board. Drawing heavily from the work of behavioural insight theory, more popularly known as ‘nudge’ theory, the fundamental idea is to create systems that don’t punish people for their innate behavioural biases, and to recognise that psychology, not a lack of knowledge, leads people to damaging financial behaviour.
As long as it doesn’t get kyboshed by the industry, the new ‘Open Banking’ initiative (due for launch within the next two years) will harness this psychology, and put people back in charge of their current accounts.
Imagine having a mobile bank app where you could view all your finances in a single place. Imagine it alerted you if a better savings account became available. Imagine you could transfer your savings to this new best buy account at the click of a button, instead of making a note to fill out an hour’s worth of paper work. All this might become possible with the new banking technology.
The data revolution has already begun. Four years ago, the government launched the MiData initiative, which gives anyone a customised recommendation of the best value bank account, based on the way they use their account. It’s not been very effective because it’s a hassle. You need to log into your online bank account, dig around to find the spreadsheet that contains your transaction and account history, take that spreadsheet to another website and upload it. The process takes about 10 minutes, which is about nine-and-a-half minutes too long. For that reason, the usage figures are fairly underwhelming.
I expect that if these latest changes are launched effectively, and data is truly opened up so consumers are in control, it won’t be long before far more people start looking at what they actually pay for financial services, and act on it. It’s potentially revolutionary.