A review conducted by the quango found businesses and individuals are loyal to established brands and have a preference for banks with a local branch.
Firms also reported the process of becoming authorised by the FSA to accept deposits lacked transparency, leading to uncertainty, while capital requirements are disproportionately affecting new entrants.
Other problems included the significant IT investment requirements, difficulty in accessing industry-wide payment schemes such as CHAPS and BACS and the lack of interbank lending.
Clive Maxwell, executive director for goods, services and mergers at the OFT, said: “Vigorous competition in retail banking is vital for personal and small business customers and helps support growth and productivity in the economy.
“If firms face significant difficulties in entering and competing in the market, incumbents have less incentive to reduce costs, innovate and price competitively.
“New firms trying to grow in this market face difficulties due to customers’ low levels of switching, loyalty to incumbent providers, and attachment to a local branch.”
Which? chief executive Peter Vicary-Smith said large banks need to be allowed to fail in order to enable smaller entrants into the market to thrive.
He added: “Since the Future of Banking Commission report, Which? has been clear that big banks are risky to competition and risky to the UK’s financial stability.
“If we want a healthy banking sector it’s vital that we find more ways to encourage good banks to enter the market and grow.”
