Challenger banks facing challenges of their own
SMALLER banks are struggling to offer their customers any kind of meaningful choice thanks to the consolidation of power among the bigger banks, they have told the Competition and Markets Authority (CMA).
They were giving evidence to the CMA as part of the watchdog's two year investigation into competition within the personal current account market, which is due to report back next month.
Amongst other problems, the smaller banks say bigger banks are given better resources with which to draw our attention, but once they've got it they hide important details about what they actually do offer.
Interest rate obfuscation
Interest rates are a key aspect of any current account, and act as a good benchmark to compare accounts from different providers against.
However, because bigger banks make their interest rates difficult to find, people are left with no useful information to begin comparisons with.
This tactic has been so effective that only 14% of people believe there is any difference between current accounts.
During last week's "round table discussion" with representatives from 10 smaller banks, one told the CMA that it was easier for people to find the interest rate for a NatWest account on their own website "than from NatWest itself".
Money, money, money
It's not cheap to start a bank, or to run one for that matter. However, smaller banks complain that they are subject to more stringent capital rules than their larger counterparts.
Paul Lynam, the chief executive of Secure Trust Bank, says "the amount of capital that the smaller banks are required to hold, relative to the larger banks, is disproportionately punitive".
Smaller banks also point to difficulties in obtaining funding and harsher regulations.
Part of the issue is that larger banks' funding comes from a number of sources: a UK Government guarantee, estimated to be "worth up to £100 billion", high quality assets and collateral, and a "huge number" of free-if-in-credit current account balances against which they can borrow.
It is the latter funding source that smaller banks have taken issue with.
They rightly point out that supposedly "free" current accounts aren't really free at all.
A combination of steep overdraft charges, poor interest rates, bundled accounts and foreign exchange charges ensure that "free" current accounts from the big banks are actually rather costly.
Smaller banks point out that overdraft charges in particular are "very difficult for customers to work out".
They estimate that account holders pay approximately £3 billion a year in authorised and unauthorised overdraft fees.
Bigger banks have recently been using these to fund ever more "generous" incentives. These range from cash rewards for switching, through to monthly cash rewards for paying money in.
They told the CMA it was no coincidence that "those offering the biggest cash incentives to switch also had the most expensive overdraft facilities".
Problems with payments
Much has been made of the fact that smaller banks have to go through their larger rivals to gain access to the payments system that processes their customers' transactions.
This gives a great deal of power to the bigger banks and means smaller banks have to charge more for basic services.
Understandably, smaller banks say it is "perverse" that "a potential competitor has to ask permission from its competitors to use its payment systems".
And this power imbalance doesn't just apply to payment systems.
Smaller banks must also agree arrangements with larger banks for things like counter services in branches. They complain that this is both "problematic and expensive" - and what is expensive for the bank, is expensive for us, their customers.
One current alternative - providing services through the Post Office - is becoming increasingly difficult as more Post Office branches are shut. This year alone 3,000 were faced with closure or dramatic restructuring.
The struggle continues
When the results of the CMA's investigation into competitiveness are published next month, it's likely that they'll require banks to be more transparent with regards to their current accounts.
This should enable us to more easily compare current accounts and to switch to those that offer us a better deal.
However, smaller banks say they will struggle to offer a better deal if they are subject to new taxes announced in the July budget.
From next year, banks with profits of more than £25 million will have to pay an 8% tax.
The tax applies to all banks - but it's being introduced alongside a reduction in the bank levy, which only affects larger banks.
The net result is that smaller banks pay more, larger banks pay less.
The Treasury have rejected requests to exempt small banks from the tax, but they say they are considering charging the tax at a lower rate, or raising the threshold at which smaller banks begin paying the tax.