Markets watchdog the Competition and Markets Authority (CMA) has recommended a full competition inquiry into banks.
The provisional decision recommends a full-scale inquiry into the banking sector including the provision of current accounts and business lending.
The process will start with a consultation, and the CMA will take a final decision in the autumn.
The banking industry said it would co-operate with the review, but that changes were already underway.
Alex Chisholm, CMA chief executive, told BBC Radio 4's Today programme it was "vital" that the banking sector worked properly, which was why the full eighteen month investigation was being proposed.
"There are a lot of under-satisfied customers out there, and small businesses are saying they are not happy," he added.
The CMA said:
- many customers saw little difference between the largest banks in terms of the services they offer.
- the number of consumers shopping around and switching between banks remained low - just 3% a year for personal accounts.
- there was limited transparency and it was difficult for customers to make comparisons between banks.
- current account overdraft charges were found to be very complex, making it harder for bank customers to choose the cheapest or most appropriate accounts.
- banks have limited incentive to compete, making overdraft charges higher than they should be.
- the biggest four high street banks ( HSBC, Lloyds, Barclays and RBS) have a 77% share of personal current accounts.
- it was still difficult for newer and smaller "challenger" banks to get into the industry, particularly in Scotland and Northern Ireland.
The banking industry said it would co-operate with the review, and any subsequent investigation.
But British Bankers' Association (BBA) said there were already "substantial" changes underway.
"Banks are pro-competition - they compete for customers every day," said Anthony Browne, chief executive of the BBA.
"Last month we published a series of ideas to help new banks set up and smaller players to grow. We hope these suggestions will be taken up by regulators and politicians."
Amongst those ideas was a proposal by the big four banks that they introduce a price comparison website, to help consumers switch accounts more easily.
But the CMA said a full-scale inquiry was still preferable.
Banking is the most widely criticised industry in the UK.
The banks have been held responsible for plunging the UK into recession after the 2008 financial crisis caused by their reckless lending.
They faced a long running campaign a few years ago against their high overdraft charges, which saw the old Office of Fair Trading pursue an ultimately unsuccessful legal challenge against the banks that foundered in the Supreme Court.
Meanwhile the banks are the subject of millions of complaints ever year from from disgruntled customers, not least because of their role in mis-selling payment protection insurance.
This scandal has already cost the banking industry more than £20bn in compensation and associated administrative costs, and the figure is still growing as more victims are identified.
This forthcoming probe from the CMA is the latest in a plethora of inquiries into the state of the industry going back nearly two decades:
- In 2002 there was a Competition Commission inquiry into the supply of banking services to small businesses by clearing banks
- In 2008 the Office of Fair Trading investigated the provision of personal current accounts
- In 2011 the Independent Commission on Banking also made recommendations aimed at promoting financial stability and competition.