Millions prepare to switch banks as UK switching service launches

Challengers such as Nationwide and Metro Bank will benefit from the new rules, which are designed to drive up competition

Millions of people will abandon their current banks and switch to a new provider, following the introduction of new rules  designed to make it easier to change banks. But estimates vary widely, from single digits to tens of millions.

Taking effect today, the UK Payments Council’s new account switching service 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 working days, and to refund in full any costs arising from any mistakes.

According to research by YouGov, funded by SAS, about five million UK current account holders are likely to switch their bank in the next 12 months. However, another estimate from Intelligent Environments suggested that as many as a third of UK consumers are poised to switch immediately – a number thatthe firm estimates at 13.8 million, based on just under 30% of the UK’s 46 million account holders.

“Our research found a third plan to switch their account as soon as the new seven-day rule comes into effect, rising to half if a competitor offers a better interest rate,” said David Webber, managing director of Intelligent Environments. “This shows that despite more than half of Brits having held their current account for more than a decade, banks can no longer rely upon consumer apathy to keep their custom.”

The figures from both studies suggesting a rise in account switching  are balanced by a survey carried out on behalf of Metro Bank by the Centre for Economics and Business Research earlier this month. The CEBR 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%.

Switching accounts has traditionally been perceived as difficult, while other factors such as the relatively limited number of alternatives have discouraged changing. A frequently quoted claim is that consumers are more likely to divorce than change banks. While this claim doesn’t stack up on closer inspection, it is true that the average account lasts 26 years – more than double the amount of time an average failed marriage lasts (11.4 years), according to figures provided by the Independent Banking Commission in its Final Report in 2011. In any case, the low rate of switching prompted the Payments Council to take action.

The Payments Council’s current account switch guarantee sets out the terms of the new switching service. 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.

“Historically, consumer churn between retail banks has been between two and three per cent, however our research suggests this could increase significantly,” said Nick Payne, retail banking consultant at SAS UK and Ireland. “What we are seeing is the commoditisation of current accounts now savvy consumers can scour the market for the package that best suits them. Banks will now have to work hard to differentiate their offerings, through enhanced customer service and targeted marketing.”

Launched in July 2010, Metro Bank is the main challenger bank in the UK and the first new bank in the country for 150 years. Metro Bank reported in May it was opening 12,000 current accounts a month. Other alternatives include building society Nationwide, which currently has 15 million UK customers, and TSB Bank, which was launched as an independent retail bank following its EU-enforced separation from Lloyds. There are also banks such as First Direct, which offers entirely online and phone-based banking (owned by HSBC) and NatWest (owned by RBS). Yet some observers note customer demand for more options.

“It’s not just traditional rivals that banks need to watch out for”, said Webber. “Although the market is currently dominated by a small handful of major high street banks, more than a fifth of consumers told us they’d seriously consider switching to Apple if it launched a bank that was integrated into iPhones and iPads.”

The YouGov research found that 57% of UK current account holders either agree or strongly agree that the UK’s banks are failing to improve customer service – a figure that rises to 65% if all UK adults are considered. However, 24% said they didn’t perceive any bank to be the best at providing customer service.

Payne added that almost half (49%) of the consumers polled said they would be more inclined to switch if their bank had failed to rectify a mistake that had personally affected them. Banks can save themselves the cost of dealing with complaints, and retain valuable customers, by harnessing big data analytics that give them improved knowledge about their customers, he said.