The FCA is wrong to focus on account portability

It’s a financial world: The FCA is wrong to focus on account portability

The FCA is wrong to focus on account portability

The
news that the FCA is to explore the move to full account portability as part of
a review of current/checking account switching is disappointing as the FCA
appears to be rushing to a solution without having really understood why
customers are not switching their account providers at the levels that
politicians and consumer lobbyists would like to see. The reason that these
parties wish to see higher levels of switching is that they see this as an
indicator of competition in the current account market which is dominated by
the big five banks – Lloyds, Barclays, RBS, HSBC and Santander.

Customer switching
has gone up by only 19% since 7 day switching was introduced

The
FCA have been triggered into action by their disappointment at the low increase
in the level of switching following the introduction of seven business day current
account switching service introduced in October 2013. Despite the investment of
$750m by the large banks in creating this guaranteed switching service levels
of customer switching has gone up by only 19%.

The large banks have
been the beneficiaries of switching

The
irony is that the biggest beneficiaries of the account switching services have
been Halifax (part of Lloyds Banking Group), Santander (one of the world’s
largest banks), Nationwide Building Society and TSB (a Lloyds clone and still
partially owned by the bank). With the exception of Nationwide, the account
switching service has done little to change the market share of the major banks
and even Nationwide has hardly changed the percentage.

The parallels between
mobile phone numbers and account numbers are not valid

However
for the FCA to jump to the conclusion that this is down to customers being
reluctant to change their bank account number and therefore account portability
will change this is both bizarre and illogical. Parallels are often made with
the mobile phone industry where phone number portability has encouraged
customers to switch between providers. However the use of phone numbers and
bank account numbers are quite different. Whereas in order for telephone
customers to be able to keep in contact with the hundreds and even thousands of
people who have their number programmed into their phones keeping their mobile
number when changing suppliers is essential the same cannot be said for bank
account numbers.

Most
bank customers have not memorised their bank account numbers. Once access to
internet and mobile banking is set up a customer very rarely needs to know that
number. When paying bills, transferring money, checking their balances, setting
up or changing direct debits or standing orders there is no need for customers
to know their bank account number. With the seven day switching services direct
debits are transferred and guaranteed that if a problem occurs that the
customer will be refunded for any charges occurred during the transfer process.
With the increasing availability of P2P (Person to Person) mobile banking
applications such as Pingit customers only need to know the mobile phone number
of the person that they are transferring the money to (which is very likely to
be stored in their phone) and don’t need to know the bank account details of
the person that they are wanting to transfer money to. It is a fallacy to say
that the reason people are not changing their bank accounts is because they don’t
want to change their bank account number.

Customer interest in
switching accounts is far lower than politicians and lobbyists

One
of the primary reasons that is quoted despite the Seven Day Switching Service making
it far easier for customers to switch current accounts is what politicians
refer to as ‘customer apathy or inertia’. The reason that customers aren’t
bothered is because for most customers banking really isn’t that interesting
(until it goes wrong or they have a financial crisis), that the actual amount
that they would save by switching from one bank to another is so minimal that
it isn’t worth the effort and that they see one bank account much the same as
another. To most customers banking services are a commodity and a largely
undifferentiated one. They have better things to do with their lives than
monitor whether one bank account is better than another.

There are significant
numbers of providers of current accounts

The
fact that the main beneficiaries of account switching have been the larger
players is not because there is not a lot of choice in the market. Examples of
organisations offering personal bank accounts include Nationwide Building
Society, Tesco Bank, Marks & Spencer Bank, Metro Bank, Co-op Bank,
Yorkshire Bank, Clydesdale Bank, Bank of Ireland (via the Post Office) and
Handelsbanken.

The
reason that Halifax, Santander, Nationwide, TSB and Metro Bank (though on a lot
lower scale than the other four) have been successful in getting current
account customers to switch to them is because of their attractive propositions
whether it be paying interest on current account balances, discounts on
utilities and other bills, convenience of branches or even offering dog
biscuits. The fact that some of the most attractive propositions have come from
the larger banks is because for most banks most personal current accounts are
either loss leaders or have very low margins and therefore to be profitable in
the current account market you need scale. That is very difficult and takes a
lot of time to build from scratch as Metro Bank is finding.

Many
of the so-called challenger banks e.g. Aldermore, Shawbrook, OneSavings Bank
and Handelsbanken are not even attempting to engage in the personal current
account market because of how unattractive it is financially. They would rather
focus on the mortgage market or SME banking where the margins are higher and
the cost to enter the market are far lower. As Virgin Money comes to the market
it is based on the profits from mortgages and credit cards that the value will
be attributed not current accounts.

The FCA is not
focusing on the real issue

If
the FCA is really interested in seeing greater competition in the current account
market then rather than investigating a solution to a problem that doesn’t
exist (customer only don’t switch because they don’t want to change their bank
account number) then they should look at how to make it more attractive for the
existing sub Big Five and new players to engage in the market with customer
friendly banking propositions. It is only when there is significant
differentiation between bank accounts in customers’ minds that switching
volumes will become significant.

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