UK account switching rising – but still below par

New research points to a gradual rise in account switching in the UK

Retail banking competition in the UK is likely to heat up over the next decade, with millions more people switching accounts every year, according to new research published by the Centre for Economics and Business Research. But current levels are still far behind those found in other industries such as electricity and gas utilities, the study found.

Produced by CEBR on behalf of Metro Bank, the research looked at switching rates in 2003 (1.7%) and 2012 (2.8%), then used econometric forecasting to predict the level of switching by 2023. The results suggested that numbers would rise from 1.3 million switching in 2012 to 2.5 million in 2023 – resulting in an annual switching rate of 5%. However, the report also drew on comparisons with the energy sector to suggest that a truly competitive market should have a switching rate closer to 10%.

“An efficient current account switching market is essential for a competitive banking sector,” said Craig Donaldson, chief executive at Metro Bank. “Increased competition forces banks to work harder to innovate, differentiate themselves and keep their customers happy. At the moment, far too many consumers put up with poor service from their bank simply because they believe switching to be too complicated. We expect that CASS will help to breakdown this perception and encourage consumers to find a bank that best suits their needs.”

The UK Payments Council’s new account switching service, which takes effect on 16 September, is intended to help drive up competition in the UK retail banking sector. The service obliges banks to switch a customer’s standing orders, direct debits etc. over within a maximum of seven days, and to refund in full any costs arising from any mistakes.

The switching service is backed by the Payments Council’s current account switch guarantee, which sets out the terms of the switch. The customer simply informs their chosen new bank of their desire to switch, and provides details of their old account. The customer then needs take no further action, as the rest of the process, including moving across standing orders and direct debits, is handled by the new bank. There is no need for the customer to inform the old bank of the switch.

However, according to Alex Kwiatkowski, research manager EMEA at IDC Financial Insights, the figures suggested by the CEBR study for the next ten years are exaggerated.

“Metro are the masters of hyperbole, but there are some glimmers of reality,” he said. “I’m not anticipating account switching to have anywhere near the effect that the press release suggests, but for sure there will be a smallish proportion of customers who will swap providers. Whether they stay in their new home, or flit between providers – akin to the same behaviour witnessed in credit cards where users chase 0% APR by continuing to make balance transfers – remains to be seen.”

In addition to the account switching service, the report suggests that other reforms, such as the introduction of account number portability, could increase the numbers to 3.2 million people switching annually (6.4%). Standardised comparison tables and more transparency over the costs associated with current accounts could bring the switching level up to 4.5 million per year (9.3%), according to CEBR.

“An open current account market will give consumers power, allowing them to easily switch from banks that don’t meet their needs,” said Donaldson at Metro Bank. “Therefore an open switching market, like the one described, will allow consumers to actively seek out what they want and need from a banking partner, forcing banks to put their customers first. Consumers will switch because they have a positive reason to move like improved customer service, and because they believe in the bank they are choosing. This makes switching a positive experience and will ensure that banks are designing their services with customers in mind.”