Bank competition is stifled, says report

State-backed banks fail to provide best rates

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Britain’s state-backed banks have more customer accounts than any of their competitors on the high street, but they are failing to provide the best rates across every product range, according to an independent commission report.

Now that large providers such as HBOS, Alliance & Leicester and Bradford and Bingley have exited the market, the options for consumers to choose between companies have shrunk.

But the range of current account options offered by providers has expanded, making it increasingly difficult for consumers to calculate which account offers the best service, according to last week’s report from a cross-party group of MPs.

The report looked into the state of UK retail banking and found that the lack of price transparency between current accounts at different banks made it difficult for customers to switch their accounts.

It also warned that the level of concentration within the sector following the consolidation of banks in the financial crisis could be having a negative impact on competition.

Nearly one-third of all current accounts in the UK are now held with Lloyds Banking Group, which includes Lloyds TSB, Halifax, Bank of Scotland and Cheltenham & Gloucester. Add in Royal Bank of Scotland, and just two groups control almost half of the 71m current accounts in the UK. Lloyds offers more than 20 current accounts, ranging from student to Islamic and fee-paying.

But customers could be better off going elsewhere for current accounts, loans, cash Isas, credit cards and mortgages.

Lloyds’ standard account for those who deposit £1,000 each month or more is the Lloyds Vantage current account, which pays 1.5 per cent interest on credit held. Those who pay in less receive no interest. Although the credit interest paid is better than that at most other high street banks, the account has one of the highest overdraft rates, charging customers 19.3 per cent, as well as a £5 fee each month.

By contrast, the best current account at the moment is Santander’s Preferred current account, which pays 5 per cent in interest on money held, and offers a free overdraft facility up to £5,000.

Kevin Mountford at Moneysupermarket.com said that consumers needed to shop around for the best deals rather than rely on the biggest banks.

“Banks won’t offer the best deals in every area – they will look at one product,” he said. “As long as consumers continue to stick with the big providers and don’t switch their accounts, then banks will continue to offer these lower rates.”

Secured and unsecured loans offered by Lloyds Group and RBS are, in the words of one analyst, “distinctly average”.

Bank of Scotland charges 9.9 per cent on average on loans, the same rate as RBS. Customers who opt to take out a £1,000 loan with M&S Money instead could save 3 per cent in annual interest.

Sarah Brooks, head of financial services at Consumer Focus, said that the Treasury committee’s report on the banking sector had confirmed what many in the industry already knew: “The banking sector is not sufficiently competitive and is failing many of its customers.”

Consumers, she said, were losing out as a result of overly-complex products that made them uncertain of the merits between accounts.

Banks have argued that the retail banking market is not as concentrated as some overseas banking markets, or even as concentrated as national industries such as retail. They claim that size is no barrier to competition and both RBS and Lloyds have been open about their ambitions to increase their share of the current account market.

But customers appear to disagree. As banks have grown, consumer satisfaction with them has fallen. According to Which?, the consumer group, big high street banks are continuing to fall short of customers’ expectations, with Lloyds Banking Group coming last in a recent survey of customer satisfaction at banks.

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