October 10, 2013, by CRBFS Professor James Devlin
When is a current account too complicated?
When is a current account too complicated?
Regulators and Government have long expressed concern that many financial products, even very basic ones, are too complicated. But what actually makes products ‘too complicated’?
Complicated current accounts
You can’t get much more basic than a current account. However, packaged accounts now account for around one in five active UK current accounts. Over the past few years, a sharp increase in the availability of packaged accounts have led many to argue that what should be a fundamental financial service is often giving consumers poor value for money, and selling it through over complexity. The complexity starts with the way these accounts are organised. For a fee of £5 to £20 a month, they offer account holders a number of services from insurance, to preferential savings and overdraft rates. In 2011, an FSA review of the current account market found that most people with packaged accounts had been sold products that they didn’t understand or need.
Despite changes earlier this year, which should have forced banks to check that they sell suitable insurance products, that remains the case today. With three to five products on offer with each account, most often low quality products such as mobile phone insurance, it’s in fact extremely unlikely that a consumer will be able to benefit from all of the services they’re paying for. Piling on cheap services can therefore be said to give these accounts a veneer of value, without actually speaking to the needs of the account holder. In addition, an OFT study from this year found that 40% of packaged account holders had paid for an overdraft in the past year, compared with 24% of those with standard accounts. The OFT had no explanation for that but we can speculate that it may be an outcome of the fact that these products often seem to be sold as a solution to high overdraft fees on a standard account.
In this case, then, we can say that bundling a number of products with different eligibility requirements, term lengths and of unknown (and often unknowable) quality coupled with confusing or opaque pricing of additional services (overdrafts, in particular) make for an over complicated product. Although growth in the number of such accounts indicates that many consumers see some value in these accounts, we can still see that their actual value is often very low.
Is the stagnant market to blame?
When these and other issues with the personal current account market have been discussed by consumer groups and regulators over the past few years, blame has almost always fallen on extremely low switching rates. According to this theory, more mobile consumers will lead to more effective competition and that competition will lead to the simpler products that consumers actually want. Yet, looking at packaged current accounts, that seems hard to swallow. These accounts have been created in an effort to induce consumers to move accounts and, in the context of very low churn, they have had some success. Consumers are paying for these products because they find them valuable and because, facing a lack of choice, they feel it’s worthwhile to pay for a service they once would have expected for free. Competition hasn’t reduced complexity, it’s encouraged it.
We might soon be able to see if that trend continues in a more mobile market. Last month, a 7-day switching service was launched to remove the complicated back and forth that has long been a barrier to moving accounts. Intervention seems to have had a more positive effect, even in the face of opposition from the banks. The OFT estimates that consumers have saved between £388 million and £928 million since the new 2008 rules, for example.
More complexity
Even the most complicated current account doesn’t come close to many insurance, investment and pensions products. In particular, unlike many other financial products, consumers shouldn’t need to seek advice before taking out a new current account. Concerns about the complexity of many other products often get tied up in the quality of the advice consumers are receiving at point of sale. These are legitimate concerns. Consumers are currently being encouraged to shop around for better annuity rates if their pension fund gives them the option, for example. These products can determine a pension holders income for decades and the wrong decision could leave the annuitants family with nothing when they die; the quality of the advice on offer is as important as the complexity of the products themselves. However, just as with competition, concerns about poor advice risk being an excuse for industry not to address inherent problems with their products which make them too complicated.
Julia Kukiewicz
Editor of Choose, a consumer information and market research site.
All views expressed are those of the author and do not necessarily represent the opinions of the Centre for Risk, Banking and Financial Services
Great article Julia. I would propose an additional factor that makes customer understanding of even the simplest products very difficult – transparency. In efforts to increase transparency, financial services firms are more actively directing customers to read and understand product terms and conditions before they sign up. In doing so they are exposing consumers to a sea of legalistic and jargonistic terms and conditions that often run into tens of thousands words. Most, if not all, customers neither have the time, inclination or the expertise to interpret these T@C’s, let alone trained advisers.