• Around 70% of personal current accounts in Britain are held by the “Big Four” banks (HSBC, Lloyds, Barclays, RBS)
• Only 6% of Britons have changed their day-to-day bank account in the past three years, 9% have switched their savings account and 10% their cash ISA
• 60% of British adults have been with their current account provider for at least a decade

The retail banking market in Britain is highly concentrated, with a Competition and Markets Authority investigation concluding in 2016 that market features, including low levels of customer engagement and incumbency advantages, were leading to “adverse effects on competition”. And a lack of competition is bad news for consumers.

The good news is that the UK’s financial regulators have acted to lower barriers to entry, and a (small) flurry of challenger banks have been established in the past few years. But while the choice in retail banking is increasing, consumers don’t seem to be exercising that choice.

I asked Anthony Thomson – co-founder of the first British app-based bank Atom, and until January its Chairman – why this was the case. Why aren’t consumers switching? Why isn’t competition working? Competition, he said, only really delivers added value if it drives differentiation, and we’re only just seeing that happen (Atom, for example, only opened to all customers in 2016). It’s not, contrary to popular opinion, that switching is seen as too much hassle, it’s that consumers simply don’t see the point. Banks aren’t yet giving customers a compelling enough reason to switch.

Take gyms. The market offers consumers a genuinely diverse choice. I can pay high membership fees and get all sorts of benefits – from the latest fitness classes to luxury shower products – or I can pay comparatively very little and get the basics, no bells and whistles. As for the banks, while traditional ones have tried to entice customers with “rewards” – £100 if you switch, 2% cashback on utility bills, £125 high street gift card – when you look behind the offer, it’s all much of a muchness. The equivalent of putting a glossy front-end on a creaking legacy system.

The corporate culture that puts profit above everything else is partly to blame for the failure of the traditional banks to really compete, according to Thomson:

“The great malaise in UK Plc today in general and in banks in particular is they think they exist to make money, they’ve lost sight of the customer.”

Which isn’t to say that businesses shouldn’t make money; but companies that are more interested in chasing quarterly earnings targets than increasing customer satisfaction are unlikely to invest in innovative, customer-centric products.

This is where the new generation of British challenger banks come in. Entirely-app based ones, such as Atom, Monzo and Starling, are truly disruptive. No bricks and mortar, no call centres, none of the baggage of a traditional bank. With significantly lower overheads, app-based banks can offer better rates for customers, and in an increasingly digital world, a more hassle-free experience.

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But it’s still early days, which helps explain why the challengers (or ‘neobanks’) aren’t yet threatening the market share of traditional banks. Atom doesn’t offer a current account (only savings and mortgages) and Monzo’s current account is not open to all customers. These 100% digital banks are differentiated, but they don’t have scale. And achieving scale requires capital. As Thomson explains, the greatest barrier to greater diversification in retail banking is not obtaining a banking licence but securing that capital. Investors willing to put up risk capital at the start, on the basis of a business plan, and not a tried and tested product, make up a small pool.

Yet there are reasons to be hopeful. People’s financial habits are changing: look at online banking, and the growth of new payment platforms and alternative sources of credit. Traditional banks look archaic to generations brought up online. And with the roll out of open banking, as Thomson enthuses, the potential for transformative disruption in the sector is huge – Google ‘bank’ anyone?

Meanwhile, in America, where digital challenger banks aren’t making much progress, a fully integrated model, which links your finances to the rest of your life, and offers hyper-personalised advice, offers and rewards might just spell the end of ‘the bank’ as we know it.

All this data-driven banking obviously won’t wipe away centuries of incumbency advantage overnight, but it will help crack open the current oligopolistic markets – which is why, as Thomson points out, the ‘big boys’ don’t like it.

Oh, and if you fancy setting up your own bank, listen to find out Thomson’s five ‘easy’ steps to doing so…

***

You can also listen to the full interview as a podcast…

https://soundcloud.com/user-970100804/meet-anthony-thomson-the-man-who-broke-the-bank/s-We7YO

CPAs, also known as “recurring payments”, are different from direct debits because they are linked to your debit or credit card, not your bank account. They are often used for subscription services – like gyms, porn websites, beauty products, telecoms – and payday loans, and a CPA allows companies to take payments whenever they think they are “owed”. More than that, those companies don’t need to give notice of a change in payment date or amount. Which makes life nice and easy for the company but not so much for their customers who often find themselves trapped in subscriptions they can ill afford and never really understood in the first place (more on that opacity later).

Surely, though, you can just cancel the CPA by calling your bank? In theory, yes but like so many theories, the practice falls short.

A 2013 review by the UK’s financial watchdog, the Financial Conduct Authority, found that many banks were not cancelling CPAs when asked to by their customers, despite the law requiring them to.[1. ‘FCA reminds banks of their obligations when cancelling Continuous Payment Authorities’, FCA, 28 June 2013] As a result, suitably chastised, the banks agreed to review all complaints about non-cancellations and repay those monies. And yet, two years on, that Citizens Advice analysis found that in 36% of cases where a consumer had requested a cancellation the bank did not comply.

But cancelling payments, while particularly urgent for families struggling to pay the bills, is just one issue. There’s a reason consumer groups talk about the “subscription trap”. We’re back to that opacity. The information imbalance between producers and consumers alone should be cause for concern – is there really a need for T&Cs to rival War and Peace? – and that’s before we even get to the shady practices, of which there are many. The “free” trials that sign you up to an ongoing paid subscription; the additional charges buried in small print and legalese; the hidden commissions; the automatic renewals.

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A lengthy report from the European Commission, for example, found that of the 900 websites they screened across Member States, fewer than 3% were free of problematic practices associated with free trials.[2. .Misleading « free » trials and subscription traps for consumers in the EU, European Commission, February 2016] And almost half of consumers involved in a mystery shopping exercise had difficulties finding out how to cancel or unsubscribe from a service after a free trail. Consumers across Europe are being played. Last year the UK’s Consumer Protection Partnership named “subscription traps” as one of the key areas of “consumer detriment”.

Market purists will argue that unless the practices are fraudulent, government and regulators shouldn’t be concerned. Consumers are signing up to the free trials by choice, they’re entering their card details for the CPA subscriptions, it’s their fault if they don’t read the small print.

At best that’s a failure to recognise that yawning gap between theory and practice. It’s also a misunderstanding of Adam Smith, the doyen of free market capitalist theory. As I pointed out in my introduction to this series, the consumer, not the producer, should be king.

As each piece in our series highlights, the balance of power between producer and consumer has swung far too far in favour of the producer – or more specifically the big business producer. Misleading, tricking, or trapping consumers is not simply the by-product of a free market model, it’s evidence, as James Kirkup says, that the model is rigged in favour of producers. Just look at the recent miselling scandals, or the secretive online “dynamic pricing”, or the predatory practices, or the fact that regulators in various markets have had to step in and cap outrageous prices (payday loan interest rates, for example, have been a target in both the UK and America, though, off the back of heavy lobbying, the Trump administration look to be rolling back US consumer protections[3. Alan Rappeport, ‘Payday rules relax on Trump’s watch after lobbying by lenders’, The New York Times, 2 February 2018]). Look at the CPAs.

The UK energy sector in particular is a good example of bad practice. In our energy podcast Henry de Zoete talks about the “Freddy Krueger” model in which the “Big Six” energy companies entice consumers with loss-leading cheap deals before ratcheting up the costs a year later – what is known in the industry as “tease and squeeze”. A 2016 Competition and Markets Authority investigation found that energy customers were paying £1.4 billion a year more than they would be in a fully competitive market.[4. . ‘CMA publishes final energy market reforms’, Competition and Markets Authority, 24 June 2016] The “poverty premium” experienced by low income households – on average £490 – is largely driven by sky-high energy tariffs. That is not Adam Smith’s capitalism.

Politicians, not just regulators, should care about rip off practices and oligopolisation – consumers are, after all, constituents. In Summer 2016, Democrat Senator Elizabeth Warren gave a speech attacking the monopolisation of US consumer markets.[5. Elizabeth Warren, ‘Reigniting Competition in the American Economy’, 29 June 2016] In it she said less competition means less consumer choice; less innovation and economic growth; and more lobbying, concentrated political power and regulatory capture. Our series this week shows that to be true.

Sadly, in America the Trump administration appears to be on the opposite path. In the UK, it is 12 months since the Chancellor promised “a green paper on protecting the interests of consumers”. “Left unchecked” Elizabeth Warren argued, “concentration will pervert our democracy into one more rigged game.” Time to rein in the big business oligopolies and put consumers back in the driving seat.

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This was strikingly apparent in some of the places I visited in 2016 during the research for my book, Hired. For those who are not part of the hidden world of Britain’s warehouses and call centres, it is easy to ignore those that are, because the latter are typically too exhausted to leave any meaningful record behind.

You can punch your credit details into Amazon’s website without ever having to think about what goes on in one of its vast ‘fulfilment centres’. Just as the people who broke their backs in the pink splodges on the map did not exist in the minds of those who sipped sherry in England’s drawing rooms a century ago, so the people cocooned inside Amazon’s warehouses may as well not exist to those browsing the company’s website. Plus ça change, plus c’est la même chose.

The cheapness of a service can also arguably alter the mentality of the person using it. While this may be anecdotal, I was told on several occasions by Uber drivers during my research that the low cost of the rides altered how customers typically responded to the person picking them up in a cab. “It’s to do with the rates,” a forty-two-year-old Eritrean Uber driver named Aman told me emphatically:

“For any service you pay, if you pay a high price you tend to have respect for that person…even though it’s the same job, or it’s the same service you are receiving, you’re gonna respect whoever is helping you more, unfortunately.”

Though not quite the same thing, while driving for Uber myself I noticed a peculiar disconnect on the part of the customer between the fare they were paying and the money I took home at the end of a shift. People in the back of my cab would regularly bemoan ‘surge’ pricing, seemingly oblivious to the fact that this mechanism – whereby a multiplier is applied to standard rates during periods of high demand – was essential from a driver’s point of view in ensuring that you earned something close to a living wage.

There is a dilemma here though: how does one oppose environmental degradation and waste, sweatshop labour and a ‘race to the bottom’, without depriving working people of the consumer goods that make life worth living? Every worker is, as it were, also a consumer, and the Amazon warehouse which is characterised by a precarious and poorly paid workforce is also churning out the consumer goods that are affordable enough for working class people to buy and enjoy.

In the case of Amazon, however, the nature of the jobs being created by the company does seem important when the company has very often been enticed to set up in a particular area using local authority cash. A street leading up to Amazon’s huge fulfilment centre in Swansea was purpose-built for the company by the Welsh government – to the tune of £4.9 million. That money came on top of an £8.8 million regional selective assistance grant given to Amazon for the cost of the warehouse to encourage the company to come to South Wales. Moreover, the year the purpose-built track was finally completed Amazon paid just £2.4 million in tax in the UK on £4.3 billion in sales – less than 0.1% of its total revenue.

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In other words, Amazon’s cheapness is not only a result of the precarious labour force that toils away in its warehouses – local ratepayers are also picking up some of the cost.

Of course, reigning in companies like Amazon might seem an impossible task when parts of the country are crying out for jobs and when average incomes are stagnating. But local authorities should look beyond job numbers alone when spending money in the hope of enticing big corporations to an area. In the Amazon warehouse I worked in in Rugeley, most of my co-workers were Romanians bought in on coaches each day from surrounding towns and cities like Wolverhampton and Birmingham. In this context it is hard to see how Rugeley was gaining a great deal of benefit from the company’s presence.

As to where the responsibility for sourcing goods and services on an ethical basis rests, it is first of all with those who can afford to pay a little more for things. There are of course ways of dealing with low pay and precarious work that go beyond consumer activism. But just as it is possible to give to charity while working towards an end to the need for it, so each of us might consider the true cost of the cheap products or bargainous rides home – and then act on that knowledge. In the twenty-first century when the internet allows us to source ethical alternatives, there are fewer excuses for ignoring what really goes into producing the plethora of cheap goods and services that we’ve slowly grown accustomed to.

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Short answer, your digital footprint – something each and every one of us has – is working against you. In 2014, the US Department for Transportation sanctioned airlines and travel agencies to collect personal user data – including nationality, marital status, address and travel history – to tailor fares, which it claimed allowed “more agile pricing and more personalised offerings”. A blunter term to describe it would be price discrimination – also known as “personalised pricing” – the practice of charging would-be digital customers differing prices based on their perceived willingness to cough up.

Of course, price discrimination has existed for decades outside of cyberspace in the form of early-bird specials for the elderly, or knock-off rates for students, but on the internet you shed the relative anonymity you have on the high street. You’re no longer part of a broad-brush vision of what a potential customer looks like, because online businesses already possess intimately detailed accounts of who you are, what you like and how much money they think you’re willing to spend with them. If it sounds ominous, that’s because it is.

These nebulous marketing practices build profiles of your habits and interests to better target adverts and search results for products, platforms or services directly at you. This data ranges from the basic – the kinds of websites you visit, how long you stay there, your IP address, your location and the type of device you’re using – to the extremely sensitive – health and financial info, your sexual orientation, age, income, parental status.

If that doesn’t sound sinister enough, the vast majority of this data is collected without your knowledge or consent, via cookies (text files which collect and store information including user names and browsing history), your IP address and tracking scripts which monitor your web browsing across sites, among other methods. In the case of the Thailand price disparity, the airline knows you’ve been looking regularly at flights between London and Southeast Asia, and therefore feels it can get away with charging you a higher amount. Every click, every new page opened, every refresh is probably being tracked.

I say probably, because there’s no definitive way of knowing. Businesses are incredibly secretive about how they track consumers across the web, which is partly down to wanting to keep their competition in the dark, but mostly down to fear of widespread customer backlash.The recent outrage over consultancy firm Cambridge Analytica’s alleged misuse of 50 million Facebook users’ personal information, taken without permission and reportedly used to create personalised adverts during the 2016 US Presidential election, demonstrates the potential pitfalls for companies who are less than forthcoming about their intentions for the data they collect. It’s little wonder consumers are losing faith in Big Tech.

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The few concrete examples we have of internet businesses exercising digital price discrimination have been met with public anger, making the perpetrators even less likely to admit to dabbling with it in the future. In 2012, a Wall Street Journal investigation found that the website of stationer Staples displayed varying prices depending on the potential customer’s proximity to a competitor. Online travel company Orbitz was accused of directing Apple Mac-using visitors to higher-priced hotel rooms than visitors using PCs. The reasoning behind this, the WSJ claimed, was because Orbitz had determined Mac owners were inclined to spend 30% more per night on hotels.

Similarly, a 2014 study by Boston’s Northeastern University found Walmart and Home Depot were among numerous online retailers modifying the price of products in direct relation to consumers’ browsing history. Even Amazon, back in 2000, was caught charging returning customers higher prices for items than new visitors, which chief executive and founder Jeff Bezos attributed to “a random price test”, adding the company had “never tested and we never will test prices based on customer demographics”.

Some people might argue the moderation of prices based on a shoppers’ perceived ability to pay is a form of digital democracy, charging the rich to subsidise the poor. The rest of us see it as commercial extortion, fueled by covert tracking of information (which may not even be correct) to manipulate us into paying over the odds. What’s more, the sweeping reforms promised by the European Union’s forthcoming GDPR (General Data Protection Regulation) –  stating user consent to cookie tracking must be clearly given – are unlikely to force firms to explicitly tell us the kind of data they’re collecting on us, and what it’ll be used for. As tracking techniques advance, marketing strategies will likely be built around tracking our moods, creating a Big Brother-esque, price-fluctuating digital dystopia.

Just as the rise of fake news forced social media firms to address their own responsibilities in circulating misinformation, the mounting anger over the Cambridge Analytica scandal should force internet giants and retailers to be more transparent in their data collection and retention methods.The tide of public opinion is turning, and consumers are fed up of being treated like cash cows. While data is important, so is trust. Lose the latter, and you’ll find yourself without the former.

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This dross can be broadcast, even on channels with a public service broadcasting mandate, between midnight and 6am. That’s thanks to an Ofcom decision in 2009, which not only classified TV gaming and betting as teleshopping, it also reduced the restrictions about when it could be broadcast. Ofcom’s argument was that since hardly anyone is watching in the middle of the night, channels should be able to do whatever they like for money.

Fair enough? No. Because the question they should have asked is: who, precisely, is watching TV when the vast majority of the population is snoring in bed?

It’s pretty obvious. People who can’t sleep watch TV at 3am. People who are drunk or stoned. People who are ill. People who are depressed. In other words: vulnerable people. And remember – advertisers will only do this because it gets them a return, which means those vulnerable people are buying. Advertisers broadcast predatory products and services in the middle of the night to make money from people whose defences are down; the broadcasters then use the money from those predatory advertisers to subsidise programming for everyone else.

This kind of predatory targeting isn’t limited to TV, or to the hours of night time. Payday lenders, pawn brokers and rent-to-buy retailers such as Bright House put their shops on the poorest high streets for exactly the same reason. Doorstep lenders don’t ply their trade on leafy tree-lined avenues, but in tower blocks and downtrodden estates.

On the internet, cookies make it even easier to find prey and chase them from site to site: if you’ve gambled, you’ll find casinos follow you with special offers. If you’ve browsed for a loan, it’s the lenders who pop up on every page. Until I flagged it with Google last year, if you searched for how to voluntarily self-exclude from gambling, it was gambling ads that popped up.

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And remember: this isn’t happening in a bubble. It creates cross-subsidies in the market which mean prosperous people pay less. People who don’t switch energy provider keep prices low for those who do. People who run up charges on their credit card keep prices low for those who don’t. Big losses by gambling addicts keep the odds good for those who can stick with the occasional flutter.

I believe this is unfair, though some may disagree, and be comfortable with these kind of subsidies from the poorest to the most financially capable. But protecting the vulnerable from exploitation isn’t just a matter of fairness or morality. Exploitation of stuck customers actually prevents markets from operating effectively – so even market purists should accept it needs to be tackled.

Let me explain.

Inactive consumers who don’t exercise their market right to switch undermine competition. Because they don’t switch, they pay over the odds. In the energy market, for example, they pay hundreds of extra pounds per year. That cash doesn’t, as a general rule, go in the back pockets of the shareholders. It goes to subsidise prices for the switchers, enabling companies to slash costs for the most active – and least vulnerable – market participants.

Then along comes a new company. It can’t match those intoxicatingly low prices because it hasn’t got the legacy customers overpaying. But it can’t persuade the high-paying customers to switch either, because they’re not natural switchers. So the new company attracts no one and it folds. The monopoly – or oligopoly – prevails.

Smart regulation should stop these unfair cross-subsidies from the vulnerable to the affluent, as well as knocking out providers whose business model is predicated on exploiting the vulnerable. Open banking regulation is a great example that should allow fintech innovators to build tools which dive into our bank accounts and help us switch providers, products and deals without even thinking about it. In energy, price caps for vulnerable consumers are helping reduce unfair cross-subsidies, but smart meters could enable us to go much further, with customers automatically switched to the cheapest provider.

But the most important job for regulators is to understand where the traps exist for the most vulnerable consumers. Proper segmentation of customer demographics should be at the core of regulators’ research priorities – because wherever you find a concentration of vulnerable people in a market, you’re finding exploitation. The 3am telegaming. The payday loans and doorstep lenders. The pre-pay energy meters. The fixed odds betting terminals. The fee-charging cash machines.

If a product is only ever bought by people who don’t have a choice, we can be pretty certain it shouldn’t have a place in our consumer markets at all. TV roulette should be the first to go.

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That’s because when there are relatively few big players in a market, companies that serve most of the customers in that market, there’s a risk that they don’t have to compete as fiercely as they should to keep their customers and win new ones. That means higher prices, worse service, less innovative products for households. For the economy more widely, it means underinvestment in the productive capacity that drives higher growth and higher wages.

Together, those things leave many people feeling ripped off, ticked off, and wondering if the system really is rigged against them.

At the Social Market Foundation, we have investigated the markets that matter most for voters’ experience of the market economy, those focused on consumers, which collectively account for about 40% of all consumer spending – cars, groceries, broadband, mobile telephony, landline-only phone contracts, electricity, gas, personal current accounts, credit cards and mortgages.

Sadly, we found that people’s suspicions of a rigged model are justified. Most of those markets aren’t working as well as they should. Eight of the ten are concentrated, a large proportion of sales made by a small number of suppliers.  Only the markets for cars and mortgages meet the description most people would have of a free and competitive model.

We also identified a link between higher levels of market concentration and lower levels of customer service and trust. That’s understandable when you consider the way people are treated.

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The pricing policies of the Big Six energy companies make it all too easy for critics of the industry to accuse firms of cynically exploiting consumers’ inertia and limited information: attractive “teaser rates” draw in new customers then mysteriously vanish, meaning many customers drift unwittingly into higher tariffs.

One of the worst practices in concentrated markets is bundling, where dominant players can offer what appear to be attractive and convenient deals to supply several goods and services together, for instance pay TV, broadband and a landline. Such deals are often expensive and unfair on customers, who cannot easily tell how much they pay for individual items – which may well be available more cheaply elsewhere.

The best remedy for harmful concentration is, of course, competition. When new challengers enter the market and fight incumbents for their customers, those customers tend to get a better deal. The UK supermarket sector today offers better deals to customers than it did a decade ago partly because of the entry into the market of chains such as Aldi and Lidl. Anyone who wants to save the market from the populists who would replace it with state control needs to think about ways to help challenger companies put big incumbents under more pressure. Competition that makes incumbents feel less comfortable is good for customers, and good for faith in markets.

Of course, we have rules and laws and public bodies who are responsible for doing this. But frankly, right now regulators and competition authorities are struggling to put up a fight on behalf of consumers.

One aspect of concentrated power in consumer industries I find most troubling is the ease with which big, rich incumbents can capture or defeat the regulators who are supposed to watch over them and ensure their market is delivering fairly for consumers.

A lot of this is about financial muscle, plain and simple. Big companies making big profits can afford to fight and win against regulators with more limited resources. One senior regulator puts it this way:

“Whatever decision we make, they can appeal, and if we have two lawyers on the appeal, they have ten. And if our lawyers are still good enough to win, they’ll get a job offer in the private sector soon enough and end up working for a regulated company.”

Some of the antics alleged in regulated industries are frankly scandalous. One telecoms executive recently told me about a rival firm that successfully gamed Ofcom’s broadband speed testing by simply cutting off a large number of rural customers with slow connections during the testing period.

I don’t say this as criticism of the regulators themselves, so much as criticism of the politicians who give the regulators their remit and their resources. Sometimes those remits simply don’t allow adequate intervention to prevent the concentration of market power that could harm consumers.

It’s an open secret that some senior officials at the Competition and Markets Authority were deeply uncomfortable about the authority’s decision in 2016 to allow BT to take over EE. The £12.5 billion deal brought together the UK’s largest fixed telecoms business and the UK’s largest mobile telecoms business. Despite widespread worries that the deal would harm consumers, the CMA’s own rulebook meant the authority had to give it the green light.

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That’s one of the challenges about competition, concentration and consumers that politicians should be trying harder to meet. Other, bigger questions include what Britain’s competition regime will look like after Brexit, and how it can be designed and equipped to deliver the best deal for consumers.

Sadly, there’s not much enthusiasm for answering such questions right now, even though the task becomes more urgent by the day.

Yet it’s noticeable how little politicians, policymakers and experts in Britain have paid attention to it. American economic debate is heavy with analysis of concentration ratios, incumbent advantage and the prospect of dramatic “antitrust” state intervention.

That’s partly a question of history: the antitrust movement of the early 20th Century, when big oligopolistic incumbents (then known as “trusts”) such as Standard Oil were broken up, still loom large in the American political imagination.

That history is getting a lot of attention in US political circles again now.[1. Maurice Stucke and Ariel Ezrachi, ‘The Rise, Fall and Rebirth of the U.S. Antitrust Movement’, Harvard Business Review, 15 December 2017] A group of economists and lawyers sometimes called the New Brandeis movement is asking all the right questions about the power of big incumbents in the markets that matters most to consumers and voters.

Anyone who wants to save Britain’s open market economy from the populists who would sweep it away needs to reflect on the lessons from thinkers like Louis Brandeis.

That might – or might not – mean the state intervening to break up big companies, but it should definitely mean that same state taking a much more active role to make sure those companies have to work harder.

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