The banking sector in the UK, always dynamic, continues to flex and morph. Newer, smaller banks are growing, desperate to break into a market dominated by a small number of big players. However, despite changes to encourage more competition, a sense of inertia remains. So why aren’t more people switching banks?
On this occasion, recent changes in the high street banking sector have been driven by external agents. Firstly, in September this year, a new account switching service was launched. This service, free for consumers, small charities/trusts and small businesses, is designed to make switching current accounts from one bank or building society to another quicker, simpler, more reliable and straightforward. As the service promises, it is “hassle-free”.
Consumer organisations and journalists have been encouraging consumers and small businesses to switch financial service providers for years. However, perceptions of the “hassle” involved has made it tough to reverse the inertia among bank customers.
The new service is an attempt to increase competition in the financial sector, by encouraging customers to change and hence breaking the concentration of accounts held by the big high street banks. As switching becomes easier, banks now have an incentive to promote their differences, and it is no coincidence that Nationwide, for instance, is currently promoting its mutual and shareholder-free status.
A second stimulus for change is the European Commission’s requirement for large banks to be split up. The government-supported Lloyds TSB is one example, already divided into Lloyds Bank and TSB. The resurrected TSB brand is promising to support the local economy and to eschew investment banking.
What else is there?
There are very viable alternatives to the somewhat tired and tarnished high street bank brands. M&S is one familiar face to move into banking, with a recently launched personal banking account. Though this will not be not “free” like many current accounts, it will have all the advantages of the M&S brand (will one be able to exchange or return financial products?).
Virgin Money aims to offer current accounts in the near future, adding to its existing range of investment and mortgage products. Metrobank tells us that it is the first new high street bank for 100 years and offers services to businesses as well as personal customers, rooted firmly in the metropolis in name and deed. Thinkmoney, based in the north-west, charges a monthly fee but guarantees that they will not make any penalty charges – a source of considerable discontent among customers at most banks.
The Swedish bank Handelsbanken promises high levels of service through its decentralised network. On its corporate website, it boasts that it is one of the world’s strongest banks.
Building societies, first established in the 18th century to offer investment opportunities as a means of financing house purchase, also offer current accounts. In addition to Nationwide, smaller societies such as Norwich & Peterborough, Coventry and the Cumberland all provide competition for the big banks.
Other providers offer a more restricted product range but occupy specific positions. Triodos Bank offers savings products with a strong sustainable and ethical position. Shawbrook Bank has a strong orientation towards business, aiming to provide some of the finance much needed by SMEs and not provided by the larger institutions.
Switching is easy, changing is hard
Financial service customers have therefore extensive choice if they do want to switch their current account. But as Jim Devlin recently remarked in this publication, bank customers feel little connection with the brand of their bank or financial service provider. While this news must make brand managers in the sector weep, the reluctance of their customers to switch over the years has generated considerable revenue for them.
Given this lack of connection, the intriguing question is why do more customers (both consumers and business-to-business) not change their bank? Reading the complaints columns of the weekend press indicates high levels of dissatisfaction and poor levels of service recovery. One clue lies in the switching service offer, which uses the phrase “hassle-free”. Inertia is in part attributable to an understandable desire to avoid hassle, whether real or imagined.
Customers may also not be able to make meaningful (to them) distinctions between financial services brands. In spite of extensive efforts by large banks, their branding has not created distinctiveness between the various providers. Customers make decisions about their financial service provider on family practices, price or convenience. Are they sufficiently disaffected with their financial provider to engage with the perceived hassle of switching?
To coincide with the switching initiative, established brands are offering financial incentives to change. But while this may benefit individuals, the benefit to the overall system is less clear. The danger is that customers may just switch to another high street brand without really changing the competitive landscape, or endowing the alternatives with the critical mass that they need to really gain penetration.