Britain's Competition and Markets Authority has opened an inquiry into five of the UK's biggest High Street banks for lack of effective competitiveness.
However, the CMA stopped short of launching a full-scale market investigation and naming the lenders. It added that Britain's 'Big Four' banks - Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland - will be helping the regulator with an industry solution.
"Competitive personal and SME banking markets are essential to households and businesses throughout the country, and to the success of the UK economy," said Alex Chisholm, CEO at CMA.
"However, our studies have found that despite some positive developments, significant competition concerns remain which mean that customers may not be getting consistently good service and value from their banks.
"Our provisional view is that a full market investigation by an independent expert CMA group is necessary to look at this market in detail and identify appropriate measures if competition concerns are found. However we very much welcome views, which we will carefully consider, before taking a final decision."
The five High Street banks that are being probed provide 77% of current accounts across the UK.
The inquiry will look at how barriers to entry and expansion for newer and smaller banks remain significant and the markets remain concentrated, particularly in Scotland and Northern Ireland.
In a radio interview Chisholm added that it was "vital" that the banking sector worked properly.
"Retail banking is worth a lot of money to the banks - £10bn a year - but also every customer in the country has an account, almost every business and every household," he said on a BBC Radio show.
"At the moment they [the banks] don't seem to be doing a good job of satisfying their customers, there are a lot of under-satisfied customers out there, small businesses are saying they are not happy with the choices they face and the services they are getting, and in the personal market as well, the big [five] banks, the satisfaction rating is below 60%."
"We are suggesting there's not enough rivalry there to be really falling over themselves to serve the customer, [to] come up with new innovations and come up with the best value and best service they can provide."
The CMA is debating with the Financial Conduct Authority (FCA) whether to launch a full-scale investigation into the entire sector after many customers reported that they saw little difference between the largest banks in terms of the services they offer.
The CMA's initial findings also showed that some banks were making it difficult for customers to customers to make comparisons between lenders because of limited transparency.
It also found that current account overdraft charges were found to be very complex.
"Whilst there have been some recent improvements, for small businesses, competition in the banking system isn't working as it should. The market is still concentrated, switching between providers is low and those running small businesses don't believe there is much differentiation in terms of the products on offer and the standard of service they receive," said Christopher Woolard, director of policy, risk and research at the FCA.
"Small businesses are the lifeblood of the British economy, employing more than half of those in work in the private sector, which is why it is vital that they have access to a banking market that works for them."