It was supposed to be the moment Britain's biggest banks had always dreaded. When new rules making it far easier for consumers to switch current account provider came into effect last September, many banking analysts predicted the big high street names, accused for years of offering a lousy service, would suffer huge customer losses.
But while the new switching regime got off to a strong start – there was a 17% increase in switching during the final quarter of last year – there is concern the momentum may have been lost.
The Payments Council, the industry body overseeing the reforms, has yet to publish data covering the first three months of 2014. But a poll conducted by market research group Weber Shandwick suggests many consumers are feeling underwhelmed by the new players that are attempting to end the dominance of Barclays, HSBC, Lloyds, Royal Bank of Scotland and Santander, which collectively have around 85% of the current account market.
Indifference and confusion More than one in two Britons don't expect new competitors in the banking sector to improve the quality of products and services available to them, Weber Shandwick's research reveals. Just one in four says an increase in the number of bank branches on high streets would persuade them to switch current account provider.
"New players in the financial services sector have their work cut out for them," says Liz Wolstenholme, Weber Shandwick's UK head of brand strategy. "Indifference and confusion among the British public are the greater forces at work, and this research shows brands need to adopt new rules of engagement." One problem may be the eclectic nature of the challenger banks – the mix of familiar and unknown names now pledging to take on the big five is a confusing narrative.
In one corner, sit the genuine new entrants to banking – the likes of Metro Bank, Aldermore and Shawbrook didn't exist prior to the financial crisis, though only the first of these new launches offers a current account.
Then there are overseas banks targeting the UK market. Sweden's Handelsbanken and Denmark's Danske Bank, for example, both see a major opportunity here and are expanding, while Bank of Ireland has a deal to offer banking through Post Office branches, which gives it a huge distribution network.
The relaunches of old brands adds further complexity – TSB was carved out of Lloyds in order to appease Europe's competition watchdogs and inherited millions of customers, while Virgin Money has taken over Northern Rock.
Finally, there are new entrants to the sector from the retail industry – Marks & Spencer has launched a much-praised current account, while Tesco has been promising something similar for some time now.
The emergence of so many challengers of such diversity prompts two questions: will they persuade customers to move to them from the big banks, and which ones offer the best deals? Andrew Hagger, who runs money website Moneycomms, believes the answer to the first question at least is yes – but that new players must offer a genuinely better proposition rather than relying on customers' disillusionment with their existing banks. "If a challenger brand can offer the killer combination of competitive rates and terms, convenience and consistently good customer service. It will soon win business from the high street banking giants," he argues.
As for the second question, the problem is that customers judge current accounts by very different criteria, depending on their own circumstances and needs. "The size of a bank or the length of time it has been around are not factors that people should be concerned with," argues Hagger. "The most important thing is to find a current account that works best for the way you run your day-to-day banking." Many of the challengers have chosen not to compete on the basis of price, with little or no interest paid to customers in credit and overdraft rates – instead, these banks hope better customer service will win the day.
The best example of this is Metro Bank, which has picked up 300,000 customers since launching four years ago. "Overwhelmingly, our customers tell us that the rate isn't the most important thing to them – service is," says chief executive Craig Donaldson. "We are built to suit our customers – we're open early and late seven days a week, 362 days a year, because those are times that are convenient to our customers; we offer free coin counting machines, cards and chequebooks printed in store on the spot, safe deposit boxes and local call centres; and as a community bank, each of our stores is run by a local bank manager who makes local decisions for customers." Alex Letts, the chief executive of Ffrees, which began offering online current accounts last year, also believes service is the battleground on which the challengers must fight - the Ffrees current account also pays no interest and actually charges for some transactions.
"Customers understand there is no such thing as free banking and they'd rather pay transparent fees upfront rather than the hidden charges the banks build in," Letts argues. Instead, he's staking his venture's future on innovative services such as rewards and cashback set up with thousands of retailers and "jamjar banking", which enables customers to save small amounts efficiently.
James Daley, the managing director of Fairer Finance, a new independent ratings service set up to rank financial services companies on the basis of how fairly they treat their customers, says these sorts of features are increasingly important. "Of course rates still matter, particularly if you're likely to use an overdraft," he says. "But once you've found a few banks that offer a fair deal, the next step should be to go for the one with a good record on service – people are more likely to change partner than bank account, so make a decision you won't come to regret." In fact, Metro Bank scores very highly on the Fairer Finance scorecard – but not quite as highly as Nationwide Building Society, a more established provider.
Not all the challenger banks believe price is the wrong differentiator. Marks & Spencer, for example, sees the 5% interest rate payable on credit balances on its new current account – 10 times more than what is generally available on the high street – as the best way for it to get noticed as it enters the market. At Clydesdale Bank, where owner National Australia Bank is investing in the hope of winning new customers, a generous rate of 3.83% is on offer.
Some providers are hedging their bets. TSB is offering 5% on its new TSB Plus Account, while simultaneously attempting to pitch itself as a challenger with different values to existing players. Products director Jatin Patel underlines TSB's efforts to present itself as a "local" bank – he pledges: "Every penny our customers deposit with us stays right here in Britain, supporting mortgages and loans for other TSB customers, which helps communities thrive across the country." In the end, customers will have to judge for themselves whether this is marketing hyperbole or a refreshing new approach.
What is certainly true is that while it may be easier to compare the hard statistics provided by interest rates, unless you maintain large sums in your current account, or are regularly and heavily overdrawn, the figures won't add up to much. Even 5% a year on an average balance of £1,000 – miles more than most people would, on average, keep in their account – is only £50. On that basis, it might be better to shift savings money into a specialist savings account and then choose a current account for other reasons.
In the savings sector too, there are new providers aiming to take money from the old guard – and many of the new deals here also play on the trust issue as much as pricing. For example, James Blower, director of savings at Shawbrook Bank, argues: "We're pushing at an open door – customers want to come to us because they're so sick of the way they've been treated by the big banks." Blower stresses Shawbrook's values in terms of promises never to pay teaser rates – where high introductory rates sucker savers in but are cut later – and a pledge to invite existing customers to take up new products where these offer better value, rather than leaving them in uncompetitive accounts.
Your right to switch Since September 2103, most of Britain's banks have offered an industry-wide account switching service that makes it far less stressful to move current account than in the past. The agreement's features include: * A seven-day switching facility – the banks guarantee to complete your switch, which will cost nothing, within seven working days * Automatic transfers of standing orders and direct debits – your new bank will seek details of regular payments you make from your former provider and set them up for your new account * A payments forwarding service – you'll need to give your new account details to organisations such as your employer that pay you but any payments erroneously made to your old account will automatically be transferred to the new bank for 13 months following the switch * The possibility of moving an overdraft – a bank can't stop you moving because you're overdrawn, though you'll have to ensure you can get similar terms from the new provider or find a way to repay the borrowing yourself * A commitment to compensation if the switch goes wrong – the banks promise to refund any costs or lost interest you incur as a result of a problem.