Sunday, 15 September 2013

Why Seven Day Current Account switching will not turn up competition

The launch this week of the Current Account Switching Service whereby UK banks will have just seven working days to switch customer's current accounts to a rival has been heralded as a key enabler of competition in the UK retail banking. In particular the Chancellor sees it as a way of encourage new entrants to build up market share.

The banks have been forced to spend hundreds of millions of pounds to rapidly put in place a system that will enable this to happen, however the expectations set by the Chancellor are unlikely to be met.

For a start this assumes that there is pent up demand to switch bank accounts that is held back simply because the process of changing accounts is too complicated or too slow. The reality is that most customers are simply consumers of banking services and see banking as a commodity much like gas, electricity or water. Despite what the banks might want to believe most bank customers rarely or never think about their banks. Who provides their banking service simply isn't  that important to most customers as long as it works.

Not only that but most customers think all banks are alike. Why would they change from one bank to another, even if the new switching services makes it marginally easier than before. Just the effort of researching an alternative bank and initiating the process of changing is more effort than most customers think is worth for the benefit they will get.

With so called 'free banking' it is even more difficult for banks to differentiate themselves for the average customer. When there is no perceived charge for writing cheques, paying bills and taking money out of a cash machine, then how do the banks make a difference in the mind of customers?

The slow take up of the M&S Bank Account can be partly attributed to the requirement to pay monthly fees, particularly given that that the target customers probably do not  believe that they pay anything for their existing accounts.

So-called 'value-added' accounts, where for a monthly fee customers can receive a bundle of addtional services such a travel insurance, breakdown cover and airmiles, have had some moderate success, but research shows that either customers do not use the additional services or they could have bought them cheaper as individual items. They are also potentially the next product to be subject to a misselling investigation given the similarity with the incentives and targets to sell these offerings to customers as were there for  Payment Protection Insurance.

The Chancellor has suggested that if the seven day switching service does not create the flood of switching that he is expecting then account number portability may be imposed on the banks. Account number portability is seen as the equivalent of phone number portability, except it blatantly isn't. Where traditionally people have had to know each other's telephone numbers to contact each other (even for this with the advent of the smart phone the number is stored and not really 'known'), there is little need to know bank account numbers in order to use the banking system. A customer only shares their bank account number with a few people and very infrequently in comparison to their telephone number. The use of bank account 'aliases' avoids the customer ever needing to know their bank account number. Having to have a new bank account number is not the reason people don't switch banks.

Should the Chancellor decide to ignore the evidence and impose account number portability then this will make the several hundred million pounds spent by the banks on the switching services look like loose change. To architect a long term solution to industry wide account number portability (unlike the switching service which has been thrown together with little thought about architecture and long term durability and has created an expensive legacy solution to maintain) will require very significant changes to the underlying banking infrastructure and the cost will be measured in billions and will be borne not only by the existing players but also new entrants. See http://www.itsafinancialworld.net/2011/01/why-portable-bank-accounts-arent-going.html

Fortunately the head of the FCA (Financial Conduct Authority, one of the two bodies that has replaced the Financial Services Authority), Martin Wheatley,  at his reason appearance before the Treasury Select Committee has already made it clear that the CASS (Current Account Switching Scheme) should be allowed to run for at least a year to see whether it has had the desired effect before any further consideration or detailed studies of the costs of providing account portability should be started. This effectively kicks it into the long grass and to after the General Election, which will be a great relief to many bank CEOs.

The Chancellor has also suggested that making direct debits and standing orders be moved from one bank to another at no cost to the switching customer should also be imposed on the banks if switching doesn't create the movement that he is looking for. This idea seems reasonable and it is reasonable as that is what the banks do already today, but is not a material factor in encouraging customers to switch accounts.

The ease of movement of  customers is only one half of the argument that the Chancellor and consumer lobbyists make for the introduction of the switching service. The other reason is to encourage new entrants and competitors into the banking industry.

However the ease of attracting and on-boarding customers is not the reason for there being so few sizeable new entrants in the market. With the increasing regulation, the higher levels of capital that need to be held (even if it can be raised and afforded in the first place) and the reduction in the ability to make a fair profit from retail banking makes entering the UK retail banking market unattractive to new entrants. Even Vernon Hill, the entrepreneur and founder of Metro Bank, the first new entrant to the UK for many years, has said that if he knew then what he knows now about how difficult it would be to get a UK banking licence he wouldn't have started. One of the reason that Tesco Bank has been delayed in its full launch has been the time it has not only taken to get a banking licence but also the time it has taken to get its executive's FSA approved.

So now that seven day switching is introduced will the big banks be quaking in their boots trying to lock the branches to stop customers leaving, making amazing offers to make them stay? Will new entrants such as Tesco Bank, M&S Bank, Virgin Money and banks we have not even heard of yet be having to close offers because of the volume of customers trying to switch to them? The answer is almost certainly 'no' because seven day switching is not the answer to creating competition in the market and the time and money spent on it will prove to have been a poor investment.

Sunday, 1 September 2013

Another blow to Government ambitions for SME lending as Nationwide postpones launch to 2016

The announcement that Nationwide Building Society is postponing its push into SME banking until 2016 is a blow for the UK coalition government, particularly coming on the back of disappointing SME lending figures this summer. The Nationwide suspension comes despite the new governor of the Bank of England, Mark Carney, announcing that the largest eight banks and building societies (which includes Nationwide) will be allowed to hold less capital once above the 7% level to encourage more lending to the SME segment.

This builds on the bad news earlier in the year for SME lending that Santander was withdrawing from the purchase of the RBSG branches. These branches have been selected specifically for their SME focus. The uncertainty as to who, if anyone, will replace Santander in taking on that business is a further blow. For while the Chancellor has talked about new entrants coming into the UK banking sector and Vince Cable, the Trade Secretary, has pushed for the banks to increase their lending to businesses and even talking about setting up a government funded bank for business, competition in lending to the SME sector has decreased rather than increased. The decision of the Co-op to stop any new lending to corporate sector has been effectively the withdrawal of another player in the market.

But should anyone feel surprised that this is the case? As one of his parting gifts the former Governor of the Bank of England, Lord King of Lothbury, pushed for banks to hold far higher levels of capital than they did prior to the financial crisis. The newly formed PRA then went on to enforce this. With the Nationwide, somewhat surprisingly given the risk averse nature of its book, being told to hold significantly more capital than it has been used to and with a growing residential and buy to let market, both of which require far less capital to be held than for SME banking and represent a far less risky way to make money, it is no real surprise to see that the Nationwide decided there were better places to use its capital at this time.

Of course this is not the whole picture. Nationwide has been for some time been going through the painful process of replacing its core banking platforms. Like Commonwealth Bank of Australia which has declared victory on its implementation of the same system two years late and with a budget that doubled to AUD1.2bn, Nationwide is finding carrying out a full heart, lungs and liver transplant of its systems is not plain sailing. It may well have been that Nationwide has not only delayed the entry into SME banking for financial reasons, but also because the new systems are not ready.

Whilst overall competition in SME banking is reduced there are one or two new entrants that are making their mark, albeit on a relatively small scale. The largest of these is Handelsbanken with in excess of 150 branches and a high level of customer satisfaction despite being very profitable. There is also Aldermore which, whilst keeping a low profile is making  notable progress.  The owners of Aldermore are members of one of the syndicates bidding for the RBSG 316 branches, so the Aldermore approach to banking may get the opportunity to scale up.

The Government may be satisfied that the UK has a safer banking environment but the price that is being paid for the additional regulation, the higher levels of capital and increased interference is that there is not only less competition in SME banking but less lending going to small businesses to fuel the growth of the economy.