New bank switching era under way
A "new era of competition and choice" for the UK's 49 million current account holders has dawned with a guarantee which enables consumers to ditch their old bank and switch to another provider in just seven days.
The new pledge, which covers almost all of the current account market, aims to take the hassle out of switching current accounts and should ultimately mean providers offering better products and customer service.
When customers change accounts, their new bank will be held responsible for all existing payments being moved over with the account and any new payments accidentally made to the old one will automatically be captured by a central service and redirected for 13 months.
The length of time it takes to switch will be cut from up to 30 working days to seven, and interest and charges will be refunded if anything goes wrong.
The initiative is being overseen by the Payments Council, which said that around 49 million people in the UK hold current accounts.
A multimillion-pound advertising campaign and a guarantee trustmark has also been launched to raise awareness and boost consumer confidence.
Adrian Kamellard, chief executive of the Payments Council, which is overseeing the shake-up, said: "Today marks the beginning of a new era of competition and consumer choice in the current account market.
"We will watch with interest over the next few months to see the effects that come as a result of the new, simpler world of current account switching."
Banks have already started ramping up competition in preparation for people making the jump, while comparison websites have reported rising activity from people searching for current accounts.
First Direct recently increased its cash incentive to switch to £125, while Halifax is offering £100 and M&S Bank is handing out £100 worth of gift cards to new customers. Halifax also reported recently that it is on track to see 300,000 customers switch to it in 2013.
Citizens Advice chief executive Gillian Guy said customers have previously felt "trapped" in their bank accounts because the switching process was complicated.
She said: " Now is the time for banks to put their customers first by looking to see how they can save them money."
Kevin Mountford, head of banking at comparison website MoneySupermarket, said the changes will reassure those who have previously been put off switching by fears that direct debits, salary payments and other transactions might go astray.
Caroline Rookes, CEO of the Government-backed Money Advice Service (MAS), described the launch as "a real boost".
She said: " Having the wrong current account can cost you money. To avoid losing hundreds of pounds through charges or lost interest it makes sense to check whether your account fits with how you use it and if not to switch as soon as possible."
The MAS has developed a new online current account comparison table to help people shop around.
Which? executive director, Richard Lloyd, warned consumers not to let banks' incentives be the sole basis for making the switch, because moving to the wrong account could be more expensive in the long run.
He said: "Banks should make it simple to compare current accounts so people can pick the one that's right for them."
Current levels of switching are generally low. This is seen as a barrier to competition between banks, which use the relationship they have with current account customers to sell them other products.
A recent report from the Office of Fair Trading (OFT) found that the country's biggest current account providers - RBS Group, Barclays, HSBC, Lloyds Banking Group (which owns Halifax), Santander and Nationwide, had more than a 90% market share in 2012.
It found the combined market share of smaller providers has dropped off in recent years, as the economic downturn took hold.
The success of the new switching scheme will not be reviewed until 2015, to give it time to bed in. The Payments Council has not set a target for the number of people expected to switch and it has said it will judge its success on criteria such as consumer awareness and improved confidence in switching.
Existing current account providers face new competition in the coming months from Tesco Bank and Virgin Money, both of which plan to enter the market soon.
It is also understood that Lloyds, which recently shed more than 600 branches as it broke off from TSB, is preparing to unveil a new customer loyalty rewards scheme in the near future.
There have already been some signs that consumers' appetite for switching is increasing. Comparison website uSwitch has reported seeing a 25% month-on-month increase in current account page views in August.
Mr Mountford said that some accounts already stand out as offering particular value, depending on individual circumstances.
For people who tend to remain in credit, Mr Mountford highlighted Lloyds' Vantage account and Santander's 123 account, both of which offer in-credit interest of up to 3%. For those who are often overdrawn, the Post Office has a relatively low overdraft rate of 14.9%, while First Direct also offers an overdraft at 15.9%.
Chancellor George Osborne said: "The new seven day switching service is central to our reforms to build
a banking system that works for customers.
"This service was a key part of the recommendations of our Independent Commission on Banking two
years ago and I'm delighted it has now become a powerful weapon for consumers."
Conservative MP Andrea Leadsom said seven-day switching was a step in the right direction but until customers could take their bank details with them to a new account, small businesses could suffer.
The Treasury Select Committee member said: "I think it's a step along the road but the real (issue) is going to be full bank account number portability. That's the place we need to get to. That's when it gets really easy for customers to switch because you take your bank details with you and that's when it gets much harder for banks because suddenly they are faced with the prospect of their customers leaving them if they don't give them a good service."
She went on: "(It would create) real competition and far better service. And of course the other issue is it would encourage new entrants into the banking world and that's what we desperately need.
"At the moment because people don't switch, new banks that are coming into the market can't get a toehold, they can't attract customers because it's very difficult to get people to go through that aggravation of switching.
"And of course for you as the customer it might be easier under seven-day switching but for all of those SMEs (small and medium-sized enterprises) , small businesses, that have then got to change your bank details every time you switch banks, actually if the switching increases it just increases the workload."