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Challenger banks could help vulnerable customers, Treasury committee told

A greater number of vulnerable customers would take up basic banking services if challenger banks could offer no-frills accounts, a Government committee has heard.

Moray McDonald, managing director of Royal Bank of Scotland's personal and business banking division, said customers would benefit if the power to open basic accounts was broadened beyond the big nine lenders.

New rules for banks came into force at the start of the year demanding the big nine lenders offer customers a simple account which does not rack up large fees.

It is aimed at customers who do not have a bank account or are ineligible for a standard current account.

Speaking to the Treasury Select Committee, Mr McDonald said: "I think it would be a great idea if competitors beyond the nine, within the memorandum of understanding, got the opportunity to offer basic bank account services to these customers.

"A basic bank account holder who likes the Metro brand and perhaps lives close to a Metro branch currently can't request a basic bank account from Metro and they might benefit from doing so."

However, the committee was told that the appetite from challenger banks to run basic accounts was likely to be low because major lenders run these services at a loss.

Stephen Noakes, managing director of retail customer products at Lloyds Banking Group, said basic accounts present an opportunity for new banks, but they are unlikely to target vulnerable customers if they cannot get a high level of income from them.

"I think where you may get more interest is if there is an opportunity to charge a small fee for added value services.

"You are now seeing some new entrants in the fintech area offering greater advice and greater service in terms of 'here is the way to best optimise your account'.

"One of the things we see in basic bank account customers is a nervousness on direct debits because they are not sure of the level of cash they would have in their account at one time.

"But if they were having advanced services regularly saying that this direct debit is coming through in X days' time you need to make sure you have X amount of cash in your account, you may see a greater level of adoption.

"However ... the fact that you cannot charge any fees will diminish the level of attraction."

Lloyds Banking Group has about four million basic bank accounts costing the lender £50 per customer. RBS holds around 780,000 basic accounts, costing the firm between £60 and £70 per customer.

The Government's 2014 agreement with the banking industry to offer fee-free accounts came into force at the beginning of this year.

However, Treasury figures revealed last week that of the eight million people who have opened basic accounts, around half could still face fees for failed payments.

During the session, c ommittee member Helen Goodman MP took a swipe at Lloyds and RBS over the way they presented basic bank accounts on their websites.

On Lloyds, she said there was a "great big screen" on its Club Lloyds service and the classic account, but right at the bottom there was a "tiny weeny footnote for basic bank accounts, which I cannot read".

"You are not really offering these to people on the same basis as the other accounts, are you?," she added.

Mr Noakes said: "The 150,000 (basic accounts) that we have opened since January 1, 45% of those have been opened through the digital channel."

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