Start-up banks face difficulties

image captionConsumers can shop around for banking services

Customers' reluctance to switch banks is making it difficult for new, small banks to enter the sector, a review has found.

The Office of Fair Trading (OFT) concluded that new entrants to retail banking faced significant challenges in attracting customers.

One of the barriers was current account customers' loyalty to established brands, the OFT said.

Watchdog Consumer Focus has argued that the loyalty is "often misplaced".


The OFT found that people were more likely to shop around for loans, but personal or business current account holders were reluctant to switch and had a preference for banks with a local branch.

Customer loyalty was particularly strong for brands in Scotland and Northern Ireland, the OFT found.

However, Sarah Brooks, of Consumer Focus, said: "Often people are unhappy with their bank but still do not switch - put off by things going wrong, the hassle involved or a negative effect on their credit rating.

"The unacceptably high level of bank complaints suggest that this loyalty is often misplaced. Until people start voting with their feet, banks have little incentive to raise their game and consumers may be missing out on better deals and service."

The British Bankers' Association, which represents the main High Street banks, said: "UK banks welcome open competition and choice for customers. The UK has a competitive market in High Street financial services with both more choice of provider and cheaper services than in many other countries."

The OFT's review found that some firms reported problems in becoming authorised by the Financial Services Authority to accept deposits, with a lack of transparency and uncertainty causing them delays and difficulties in raising funds.

Requirements on the amount of capital they must hold could also disproportionately affect new entrants and smaller banks, it said.

However, it said a number of firms had recently entered the market - such as Metro Bank - and more were expected to follow.

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