Friday 19 August 2016 12:25 pm

CMA proposals to hit bank profits in latest squeeze on sector

Banks should prepare for another squeeze on profits thanks to the latest recommendations to boost competition in the sector.

Ratings agency Fitch said today proposals from the Competition and Markets Authority (CMA) to encourage customers to switch bank accounts would put even more pressure on bottom lines at the UK's top high street lenders.

The central plank of the CMA reforms, published to a mixed reaction from industry earlier this month, is to create a new "Open Banking" programme which will allow customers and small businesses to share their data and manage their accounts with multiple providers through a single app.

The scheme will be funded by banks, and is designed to build on the older seven-day current account switching service which was supposed to increase the portability of bank accounts and promote switching and higher awareness of things like fees, interest rates and overdraft limits.

Read more: How did bank shares react to the CMA recommendations

Fitch says because the idea behind the proposals is to increase competition in the sector, this should naturally drive down revenues and, therefore, hit profits at the top providers. It warned the recommendations "could lead to a slow but steady erosion of profitability at the banks."

However, analysts at the group also added their voice to the chorus of those suggesting the CMA's recommendations may not have the desired impact.

"The initiative depends on customers being comfortable sharing sensitive financial information with other banks and third parties, which could represent a major barrier."

The ratings agency concluded, therefore: "The structure of the UK banking sector – dominated by a small number of large banks – means that it will likely take time before the CMA initiative affects pricing and profitability."