Bank customers will be able to transfer money between accounts within hours not days, George Osborne announced today, as he promised a banking “revolution in customer choice”.
Credit and debit card companies will also be forced to pass on money to businesses in a fraction of the time it takes at present as part of a package of measures to improve confidence in the banks.
It will also be made much easier for bank customers to swap their accounts to another provider while new entrants will be encouraged to come into the market.
In a speech in Dorset Mr Osborne said choice was the most powerful tool we have to improve markets and customer service, reward good companies and penalise poor ones.
“One of the prices we’re paying for the financial crisis is that our banking sector is now dominated by a few big banks,” he said.
“It verges on an oligopoly. I want new faces on the high street. I want upstart challengers offering new and better services that shake up the established players.
“From September this year, every customer of every bank in Britain will be able to switch their bank account from their existing bank to another one in seven days. All they will have to do is sign up to a new bank – and the rest will follow.
All the direct debits, the standing orders, everything will be switched for you with no hassle. This is a revolution in customer choice.”
Mr Osborne also promised a revolution in the payments systems which is crucial to the banking system.
“Why, in the age of instant communication, do small businesses have to wait for several days before they get their money from a credit or debit card payment?” he asked. “Why do cheques take six days to clear?
“Customers and businesses should be able to move their money round the system much more quickly. Why is it that big banks can move their money around instantly, but when a small business wants to make a payment it takes days?
“The system isn’t working for customers, so we will change it.”
At the same time Mr Osborne announced he would introduce new legislation which, for the first time, will force banks to split up their investment arms from their retail operations.
The move is designed to prevent banks "gambling" with deposit money and allow banks' investment arms to go bankrupt without threatening savers. Any bank which fails to comply with the new rules could be forced by the Bank of England to sell off its investment or retail operations – the so -called "electric ring fence".
The decision to "electrify" the ring fence between customer banks accounts and investment banking is a surprise as Mr Osborne and other senior ministers had previously appeared hostile to the move.
However the Chancellor is thought to have concluded that the proposal, put forward by the Chairman of the Banking Commission, Andrew Tyrie, was necessary to reassure the public the new rules have "teeth" and couldn't be manipulated by the banks in the future.
Mr Osborne also took swipe at the Labour leader, Ed Miliband, suggesting that his anti-bank rhetoric is damaging a vital British national interest. "Any bunch of politicians can bash the banks, chase the headlines, court the populist streak," he said.
"But what good would that do our country? The jobs, the investment, the banking system we all need would go with it. Let's take the anger we feel about the banks and turn it into change to build the banking system that works for us all."
Labour's Shadow Treasury Minister, Chris Leslie, said the Chancellor was being dragged towards a partial climbdown.
"We must see fundamental cultural change in our banks," he said. "If this does not happen then banks will need to be split up completely, as we made clear in the autumn."