The Financial Conduct Authority (FCA) has told British banks that mobile banking apps and text alerts need to be fully utilized in assisting customers to better manage their finances.
A report by the City watchdog highlighted that signing up to either of these services reduces the amount of unarranged overdraft charges incurred by up to 8%, and signing up to both services has an additional effect, resulting in a total reduction of 24%.
Highlighting the benefits of automatic triggers, without having to actively acquire it, as well as having the facility to act quickly, the process works as it boosts customers’ confidence knowing that when they move money into their savings accounts, banks will alert them if they near their overdraft to react before being charged.
"Consumers may intentionally keep high balances to protect themselves from incurring overdraft charges, especially if they find the cost of paying attention to their account to be high," the report stated.
The FCA admitted that annual summaries, a regulatory-driven innovation, has "had no important effect on the behavior of customers". It did, however, highlight the fact that text alerts, a commercially developed and regulatory-backed innovation, led to substantial decreases in the amount of unarranged overdraft charges incurred and balance levels.
The Regulator went on to say that text reminders are a more effective way of changing behavior: "These services reduce the time and effort needed to monitor balances, so consumers can keep a lower buffer in their account while continuing to avoid overdraft charges and earn interest on excess balances in accounts with higher credit interest rates."
According to the report, text alerts and mobile banking apps also reduce current account balances by 17% to 24%, which is beneficial for consumers as they reduce the cost of holding funds in accounts with low credit interest rates. These services also appear to encourage consumers to switch without closing their original account.
This report was collated by analyzing monthly data on consumers of two major banks in the UK between 2011 to 2014. Unique account level data was analyzed on a representative sample of 500,000 customers over 30 months for one bank, and aggregated data over 36 months from the other.