The UK's high street banks have been ordered to launch an "open banking" digital system for their customers by early 2018, in an effort to promote greater competition. The Competition and Markets Authority (CMA) watchdog said that new technology will enable customers and small businesses to manage their accounts and share their data with other providers through an app on a smartphone.
The CMA launched this review two years ago in a bid to sweep in greater competition in the banking industry.
The UK's four major banks – Barclays, Royal Bank of Scotland, Lloyds Banking Group and HSBC – dominate 77% of personal current accounts, and 85% of business accounts. Customers currently switch accounts less than once every ten years.
The CMA said it will require banks to alert people when they are falling into unarranged overdrafts to help them avoid charges.
It added a quarter of current account holders in the UK have unarranged overdrafts, which generates about £1.2bn of revenues a year for banks.
The CMA will also order banks to publish information on the quality of service on their websites and in branches.
It said: "Whether a personal customer or small business is willing to recommend their bank to friends, family and colleagues will be a core measure".
The CMA said its set of measures will save consumers and small businesses around £1bn over five years and is aimed at making high street banks work harder to keep customers.
Currently, only 3% of personal and 4% of business customers switch to a different bank in any year, the watchdog said.
It added personal customers could save around £92 on an average per year by switching provider, while small businesses could save around £80 a year on their banking.
Alasdair Smith, chair of the retail banking investigation, said: "The reforms we have announced today will shake up retail banking for years to come, and ensure that both personal customers and small businesses get a better deal from their banks."
"We are breaking down the barriers which have made it too easy for established banks to hold on to their customers."
"Our central reform is the open banking programme to harness the technological changes which we have seen transform other markets. We want customers to be able to access new and innovative apps which will tailor services, information and advice to their individual needs."
However, consumer groups and smaller banks encouraged by government to set up in the wake of the financial crisis in a bid to promote competition, do not think the measures go far enough.
Which? director of policy and campaigns Alex Neill said: "The steps outlined today, to provide customers with better information and an improved switching experience, are welcome.
"However it is questionable whether these measures will be enough, not only to increase competition but also to ensure banks deliver a better service for their customers."
"The Financial Conduct Authority must now test these remedies and decide if they measure up and will deliver much needed improvements in banking.
"The regulator should review unarranged overdraft charges in comparison to other forms of credit and crackdown on punitive fees."
Challenger lender Metro Bank said it was unhappy about the amount of cash smaller banks should hold in its reserves, called capital requirements, compared to larger systemically important rivals.
Metro Bank chief executive Craig Donaldson said: "After more than two years in the writing and costing several millions of pounds, we are astonished that the CMA's findings do not attempt to level the playing field for new entrants and challenger banks, by recommending that the Prudential Regulation Authority looks into disproportionate capital requirements.
"Disproportionate capital requirements are anti-competitive and unduly support the large incumbent banks by allowing them to hold up to 10 times less capital for the same loans than challenger banks.
"The CMA was given a rare opportunity to support and develop competition in banking, it is disappointing that they decided not to get at the root of the problem, but rather they missed the point and tinkered around the edges."