Thursday, 20 January 2011

Why portable bank accounts aren't going to be here anytime soon

At the Treasury Select Committee on Competition and Choice in Banking, Jayne-Anne Gadhia, CEO of Virgin Money proposed that one day she would like to see portable bank accounts in the same way as today where you can have a mobile phone number for life. She is not the first person, nor will she be the last, to suggest this as the way to make it easier to move bank accounts, create more competition in the market and make it easier for new entrants to rapidly build up market share.

Across on the other side of the world the Commission looking into competition in the Australian banking market also considered this as the way to make switching banks easier. There were many in Australia who hoped that the implementation of portable account numbers would be one of their recommendations that would pass into law. Having taken hearings on the topic instead a review into the feasibility of this has been commissioned, effectively kicking it into the long grass.

In theory it certainly sounds like an attractive solution to overcome the reluctance of customers to move their bank accounts. Customers can do it today for their phones, gas and electricity, so why not for their bank accounts?

To find out why it is not as simple as that you have to understand the origins of our bank account numbers. When banks originally started operating your bank was effectively your branch. You would go into your branch to pay in some money and the amount would be handed over the counter and the clerk would write with his quill pen in the ledger on your account page  how much you have paid into your account. When you wanted to take some money out, the process would be reversed, the money would pass the other way over the counter and the clerk would write down the withdrawal amount with the quill pen in the ledger.

Not a lot has changed since then, particularly with some building societies where there is no on-line updating of accounts but rather entries are held locally in the branch ledger (albeit electronic) until the end of the day when the accounts are balanced and head office updated. Even in today's global retail banks customers have to 'belong' to a branch and the bank sort code and account are associated with a single branch. The whole payments process that transacts millions of transactions every day and the cheque clearing process are all based around the premise that a customer is identifiable by their sort code and account number. Each bank has a set of sort codes that tells the payments system which bank to transfer the money to and to which branch

To have portable bank accounts the connection between the customer and their bank and their branch would need to be broken and replaced with some other identifier. This is not minor surgery, it is more like a heart, lungs and brain transplant all being performed simultaneously with the added handicap of the anatomical guide to the human body having gone missing. It would effectively mean the re-writing of not only the core banking system of every bank but also the re-writing of the payment systems. Almost all of our banks and building societies are working on extremely old banking systems for good reason.The banks have shied away from replacing because the knowledge of exactly how they work has been lost as the original programmers have either retired or gone up to the great card punchrooms in the sky, and the risks associated with refurbishing or replacing them have been seen as too high and the benefits too low.

At a time when governments all over the world are looking at de-risking banks and where over the last few days and months we have seen National Australia Bank losing its payments systems for a couple of weeks, Bank of Ireland's systems going down,  Lloyds Bank's payments system paying out double and Bank of America losing its core systems for a weekend, no politician is going to mandate the high risk action that the banks must make the changes to make portable bank accounts viable.

You can completely understand why new entrants would like portable bank accounts as a way of easing their way into the market, but the reality is that it isn't going to happen anytime soon

Update June 2011.

The proposal by Lloyds Banking Group that the banks should create a shared database of direct debits and standing orders so that when a customer switches banks the direct debits don't get lost in the process appears to be getting traction across the banking industry. It is based on the model deployed in The Netherlands and is also being considered by the Australian banks. Lloyds is estimating that the cost of this change for the industry could be in the order of £2bn. This is still major surgery on the core banking systems but it is not the full blown account number portability that mnay new entrants are calling for.

Account number portability is increasingly becoming irrelevant. When more and more people don't even know their own telephone numbers, let alone others, due to storing their numbers in their phones, on their computers and iPads, and having the ability to speed dial, it brings further into question the need to know a long bank account number. With the increasing use of alternative ways of identifying yourself, the growth of mobile payments and the alternative means of making person-to-person payments then the need to know your account number will become increasingly redundant.

There are two real issues that stop people switching. Firstly there is the lack of sufficient differentiation between the banks to make it worth people changing bank accounts - banking continues to be seen universally by customers as a commoditised and poorly delivered service. Secondly there is the fear that the process will fail and extra costs and hassle will be occured. The Lloyds Banking Group proposal will only help address the latter (and will be some considerable time coming).

As the banks wrestle with the paradox of how they can make it easier for customers to leave them whilst retaining their customers then their focus has to be on how they differentiate themselves in the eyes of their customers and that is where the investment really needs to be.

1 comment:

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