Account switching guarantee fails to end speculation
The banking industry spent £750 million implementing the account switching guarantee that went live on September 16. The move was intended to stimulate competition in the UK’s highly concentrated retail bank sector, but some harbour reservations as to whether the initiative will make any difference in the long term.
Some see the move as a fig leaf. UK members of parliament, such as the Conservative’s Andrea Leadsom, have called for account-number portability, arguing only that can generate the kind of real competition necessary to shake up the British retail banking system.
The account switching guarantee is managed by the Payments Council, but its fate lies with a new payments regulator, which will come into being by the end of next year and assume much of the Council’s responsibilities.
This will leave the Payments Council as essentially a trade association, though there is said to be a possibility it will cease to exist.
Not everyone sees account-number portability as the answer. A source at one UK bank argues it would prove unfeasible, calling for the account switching guarantee scheme to be given more time. The scheme will achieve the same outcome in a more cohesive manner if given time to develop, the source says.
British banks are reluctant to introduce account-number portability because of the potentially huge investment that would be needed to their systems to make it work, says Chris Dunne, payment services director VocaLink.
“The telcos also fought it, but when they realized they had no choice they found a solution that worked for them,” says Dunne. “If the industry is mandated to introduce this, then a solution will be found. It’s amazing how practical people can be when they are told they have to do something.”
The solution for the telcos was to create an independent, central database for phone numbers. VocaLink believes something similar could work for banks, with account numbers and sort codes merged to create a single 14 digit number, which it would manage itself and independent of the banks.
The sort code would no longer be tied to a particular bank but would indicate the origin of the account, just as the first five digits of a UK mobile number indicate which network a number started life with.
However, according to Steve Davies, head of retail banking at accountant and professional services firm PwC, this proposed solution, while being easy to conceptualize, is simplistic. People have a far stronger attachment to their mobile phone numbers than they do to bank account numbers, he says.
And while customers might worry about disruption to their direct debits if they change bank details, implementing account-number portability for this reason is like cracking a nut with a sledgehammer, adds Davies.
“The real issue holding back account switching is not account portability, or even the ease of switching between accounts,” he says. “The issue is people find it hard to differentiate between providers, in part because of a lack of innovation in the market.”
It will be surprising, for that reason, if last month’s account switching guarantee makes any discernible difference to long-term account-switching trends, adds Davies.
What is needed to increase competition is innovation, and that will not come while current accounts are free at the point of use, says Davies. In the US, Australia, Canada, Japan and elsewhere, retail banking is not free, leading to superior innovation and competition, exemplified by developments in the digital and mobile banking space.
Another argument for account-number portability is it would force banks to overhaul creaking account platforms. Such an overhaul is long overdue, says Dunne.
“Some banks haven’t changed parts of their platforms for decades and some are still using patches on pre-decimal systems,” says Dunne. “Oral evidence to the Parliamentary Commission on Banking Standards described some of these platforms as essentially being held together with chewing gum and sticky tape.”
There is no doubt that technology platforms at most banks need substantial investment, but Davies says that is a separate issue that should not be artificially linked with account portability, a distraction that will only complicate an already daunting challenge.
The Payments Council claims any push to full account-number portability is premature. The Office of Fair Trading has set a deadline for 2015 before it will judge the scheme, and the Council argues it makes sense to wait until then before more disruptive measures are pursued to achieve the same goals.
Proponents of portability believe it would introduce real competition to the UK retail banking market, and might also simplify the bank-resolution process in the event of a failure, says VocaLink’s Dunne.
“Under this system, the belief is that if a bank failed the accounts could easily be rerouted to a new bank, which may make bank failures much easier to deal with,” says Dunne.
The Payments Council refutes this, stressing no cost-benefit analysis has been conducted on account-number portability, meaning there is no credible evidence that it will be more effective in promoting competition, or that it can be delivered within an acceptable budget. Implementing such a system would mean new account numbers would have to be issued to every bank customer in the UK, it warns.
While lip service is paid to the virtues of opening up the retail banking market to greater competition, some have reservations about potential unintended consequences. Making it too easy to switch banks could increase the frequency of cyber runs.
It could also have some problematic regulatory implications. For now, retail deposits are considered among the best and stickiest forms of capital for a bank to hold under Basel III.
However, if such deposits were no longer so sticky and depositors became more active in hunting for the best deals in fees or interest rates, for example, the assumptions underpinning Basel III might need to be revisited, and it might become harder for banks to justify making longer-term loans.
For now, there is no sign that banks are thinking this way. “Clearly there will be winners and losers from this, but all banks seem to see this as an opportunity to gain market share,” says the Payments Council spokesperson.
So far, he adds, banks have been looking to compete almost exclusively on positive factors such as better customer service, interest rates and fees.