Showing posts with label free banking. Show all posts
Showing posts with label free banking. Show all posts

Friday, 7 March 2014

This is not just any fee-free current account, this is a Marks & Spencer fee-free current account

Marks & Spencer have announced that they are to launch a fee-free current account. The account will have no overdraft fees, the first £100 of which is interest free and a (relatively) low interest rate for overdrafts of 15.9%.  For those who transfer their main banking account to M&S they will receive a £100 gift card. A key attraction for M&S customers will be the loyalty scheme where points are earned for debit card spending in M&S stores and online. It also passes the critical requirement of allowing customers to bank online as well as on the phone or in store.

A key differentiating feature is not charging a transaction fee for ATM cash withdrawals made with the debit card abroad. For both Metro Bank and Nationwide the lack of transactions fees when abroad attracted customers; however that feature was withdrawn and both now do charge fees for transactions abroad.

On the face of it this is a competitive offering and should be attractive to to both M&S and non-M&S customers alike.

This is not a new market entry for Marks & Spencer (they launched their fee-charging account with a similar loyalty scheme in September 2012) but rather a change of their positioning re. free banking. M&S claims that their fee-charging account has been successful with M&S customers, so this does raise some questions as to why they should launch a fee-free product and at this time.

One of the dangers to M&S of having similar current account products with one offering a fee and one not is self-cannibalisation. Will customers of the current fee charging account be happy to see that whilst they are paying a fee other customers are not paying one for what seems a remarkably similar product? Will some of those customers look to switch to the fee free product? M&S is allowing these Premium Customers to switch their accounts to the free one and will even give them a £100 gift card if they switch their main account to M&S.

Of course this is not just a current account this is an M&S current account. Except it isn't. It is actually an HSBC current account as it is HSBC that is not only behind M&S Bank but owns 50% of the bank. While M&S may position itself as being good for current account competition in the UK market, with HSBC behind it the impact on the market share of the Big Four banks will be none.

Another question that M&S will, hopefully, have considered is what types of customers will be attracted to this account? With no mandatory minimum monthly amount that needs to be paid into the account, customers may only open this account for the loyalty scheme and maintain minimum balances or, as Nationwide found with its credit card, only use the card for cash withdrawals abroad. For a current account to be profitable for a bank it is important for it to become the primary customer account where the customers salary is paid into and the mortgage and other core regular payments come out of it. Without high current account balances or large overdraft fees (which the account does not charge) current accounts for banks are loss leaders. For M&S they need to demonstrably see the customers of their current accounts spend significantly more in M&S stores and online than non-current account customers for the bank to be deemed a success.

For those championing an end to so-called free banking, the launch in September 2012 by M&S of fee-charging current accounts was seen as setting an example to others that would help to accelerate the end of so-called free banking. For those championing an end of free banking, this recent news from M&S that they are launching fee-free accounts will be seen as a step backwards delaying the end of free banking further.

So why have M&S made this announcement at this time? There are already successful non-Big Four banks, particularly Nationwide, Metro Bank and Santander (with their 1-2-3 account) as well as HSBC-owned First Direct who have been taking advantage of the delays and the problems that other challenger banks have been facing in getting their current account propositions right. Now however with Tesco having announced that it will (finally) launch its current account offering this summer and Virgin Money expected to launch its basic bank account later this year, M&S is clearly keen to get to the potential switchers ahead of the others.

But why have M&S decided to launch fee free products given the issues and risks discussed above? It can only because of the need for volume. Running a profitable current account business with all the investment in infrastructure such as contact centres and IT, in personnel and marketing requires scale. Clearly M&S, despite their protestations, haven't achieved this with their fee charging accounts and they see this as an opportunity to build a bigger customer base which will reduce the marginal cost of running a bank.

It will only be some months after the launch of the both the new M&S fee-free accounts and the Tesco current account that it will be clear whether this move was good news for M&S' beleaguered shareholders and customers or not.

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.

Tuesday, 2 October 2012

Is Bank of Ireland leading the way for UK banks?



The Bank of Ireland is making some bold moves that the UK banks have to be curious to see whether they are successful. From November customers with the Bank of Ireland will need to maintain a current account balance above 3000 Euros (£2400) to avoid paying charges for banking services. The UK banks will certainly be interested to see how customers react to this, what is essentially an end to free-banking for a large proportion of the Bank of Ireland customers. There are two obvious outcomes from this move. Some customers will simply accept the charges  and some will leave, either for other banks and building societies or will join the ranks of the unbanked. The customers who stay  with the bank will become more profitable, certainly a requirement for the bank to overcome the problems it continues to face as a result of the financial crisis. However will the bank be less profitable as a result of the customers leaving? The majority of the customers who will take their banking relationship elsewhere will be those with low current account balances, arguably some of the least profitable customers they have, so the bank may not be that upset to see them leave. Indeed the Bank of Ireland may actually be delighted to see these customers joining competitors taking up their rivals time and resources.

The second bold move on the part of the Bank of Ireland is to reduce over the counter cash services in 40 branches to only three days a week. In these branches on the days when a teller service is not available customers will be able to use self-service devices. The Bank of Ireland argues that in their successful pilots 80% of over the counter cash transactions can be serviced by other banking channels. When you examine the personal customers that continue to use teller executed cash transactions the vast majority will fall into the low current account balance segment that will be hit by the introduction of bank charges, those who are currently unprofitable and therefore those that the bank wants to either pay their way or are happy to see leave. However it is the business customers who carry out the majority of over the counter cash transactions and these are, generally, profitable customers. It is these customers that the Bank of Ireland will want to retain and hope to do so by persuading them to either use self-services machines, other banking channels or restrict their cash transactions to Mondays, Tuesdays and/or Fridays. Of course ultimately if customers can live without tellers for two days a week the Bank of Ireland must be hopeing that in the end they live without them at all.

The reason that these moves by the Bank of Ireland are particularly interesting for the UK banks are that they are faced with pressure from the Government to end so-called 'free banking', there are too many customers who are simply unprofitable and all the UK banks have too many branches. If Bank of Ireland can prove that the introduction of fees does not result in a significant defection of profitable customers to rivals then it is to be expected that the UK banks will follow suit. If the Bank of Ireland can also demonstrate that business customers can be persuaded to use other banking channels and self-service devices for over the counter cash transactions then UK banks can look at reducing the costs of branches by reducing the number of staff that are employed in them or even closing them.

When it comes to personal customers using teller services all of the major UK banks with the exception of Santander, have signed up with the Post Office to allow their customers to carry out these transactions in the Post Office branches. It doesn't take a great stretch of the imagination to hear the banks make the argument that if there is a Post Office in town then there is no need for a bank branch and for branches to subsequently close. This could lead to the Post Offices processing the vast majority of over the counter cash transactions. The irony of this outcome is that the bank behind the UK Post Offices financial services is none other than the Bank of Ireland.

Monday, 10 September 2012

Winners and losers if 'free banking' ends



With UK politicians appearing to see the end of so-called 'free banking' as a panacea for the woes of retail banking, bringing about more competition and a fairer deal for customers, who would the winners and losers be if the end of free banking came about?

If there is to be transparency about fees, which is the whole point of the end of free banking, then the charge will need to be related to the cost of providing that service.

Certainly those who use branches for transactions will be worse off. So the person who comes into the branch on the daily basis to have a chat with the teller and withdraw £10 (as I witnessed at my branch recently) is going to find that experience expensive. Some of the most vulnerable people in society who have low balances and see their branches as part of the community and a way to break the monotony of life will find that this will no longer be affordable to them.

As is already being seen for customers of RBS and Lloyds TSB with basic bank accounts (accounts where there is no overdraft facility and the most basic debit card)  who are already not being allowed to use ATMs which don't belong to the bank who their account is with. This is due to the charge each bank makes to other banks for allowing their customers to use their cash machines Come the end of free banking when charges for making a withdrawal from an ATM will kick in, as already exists in Australia, then those customers with basic bank accounts and low income earners who will be worse off.  Having a bank account will become for many of these people a luxury that they can't afford. The knock on effects will not be limited to the individual, but also government. Government relies on bank accounts to pay benefits into. By the number of people without bank accounts rising and the continued closure of post offices the cost of getting benefits to individuals will rise.
The knock on effect of not having a bank account for the individual is far more than the loss of banking services. The cost of  utilities - gas, water, telephone, etc rise if customers are not able to  have direct debits, since these attract discounts. This will drive low income households further into poverty.
Charges for transactions in branches will inevitably be higher than transacting online or via a call centre (due to the costs for banks being higher to provide these services). As a reuslt there is likely to be a drop in the number of transactions being carried out in branches, which will inevitably lead to branch closures. Many branches, particularly in rural areas, already struggle to be profitable because of the low volume of business transacted in them, so once again the vulnerable, particularly those without access to public or private transport, will be hit the hardest.

One of the arguments for the end of free banking is that charges will be fairer and, in particular overdraft charges will drop. However with the end of free banking interest on balances will need to be paid, and not at the paltry 0.1% banks had been paying prior to the financial crisis. With the wholesale markets expensive, attracting customer balances is a lower cost way of banks raising funds. This will be where competition may well come in as banks and new entrants compete for customers who have a high average balance from month to month. This could lead to a situation where rather than overdraft charges falling they may rise as the balance of the number of customers with large balances to fund those overdraft moves to the competition and  hence the cost of funding the overdrafts for the banks rise.

Another set of losers will, ironically, be those who manage their current account well. These are the people who maintain a low current account balance, don't go over drawn and use direct debits and standing orders to pay their bills. These are the customers who are currently subsidised by those who maintain high current account balances and those who regularly go overdrawn. These smart users of banking accounts, however only become profitable when they use other facilities such as mortgages, credit cards and loans. There is clearly an argument that these are precisely the people who should be paying a fair price for the services they use.

The fundamental challenge for any government who brings about the end of free banking is how to address the issue of the unbanked and the low earners. Certainly with the introduction of fees competition could increase, but it will be competition for the profitable customers, which does not represent the majority of the customer base of the big five banks. Without the economies of scale of a large customer base the big five banks will not be able to maintain the large branch networks they currently do.Compelling the big five banks to offer basic bank accounts and maintain a large branch network, but not compelling new entrants to do that, whilst populist, cannot be a long term strategy. Already the banks being forced to sell basic bank accounts are demonstrating that they are no longer prepared to do this at a signifcant loss.

The alternative is to take the unbanked and basic banking sector out of the commercial sector and have a state funded and run basic banking service. The level of investment required to set this up, particularly given the current economic climate, makes this option unlikely in the extreme.

So whilst the politicians can clamour for the end of free banking it is highly unlikely that anyone will be brave  (or foolish) enough to actually bring this about.

Tuesday, 28 August 2012

Is free banking holding back competition?



The UK Parliament review of the banking sector following a summer of scandals across the sector has, once again, raised the question of whether the end of the British system of so-called 'free banking' would introduce further competition into the sector. There are many who argue that free banking is a major barrier to entry for new competitors in the sector. However there is no evidence that this is the case.

In Australia, where there is the greatest transparency the cost of banking, where almost every transaction attracts a fee, the market is dominated by the so-called Four Pillars - ANZ, Westpac, Nab and Commonwealth Bank. There are smaller players such as Bendigo Bank, but despite the lack of free banking the split of the market is almost identical to that of the UK.

A number of new entrants already operate, or have announced that they will, exclusively non-free banking. Handelsbanken, the most successful of the new entrants with over 100 branches and the highest customer satisfaction of the UK banks (see http://www.itsafinancialworld.net/2012/01/customers-love-banks-who-charge-them.html), does not offer free banking. Marks & Spencer have announced that their current account will charge fees and even Virgin Money, the consumers' champion, has announced that its current account will charge a 'small fee'.

So whilst there is increasing competition in the UK retail banking sector why are the new entrants not able to make any more than a small dent in the share of the big five banks (Barclays, Lloyds Banking Group, RBS, HSBC and Santander)? One of the key reasons is the economies of scale required to be profitable in retail banking.

Owning and operating the infrastructure (the ability to process standing orders, direct debits, transfer money, access to ATMs etc) required to process billions of transactions reliably requires very large amounts of capital. Whilst the recent issues that RBS recently had with processing transactions, the UK banking infrastructure is amongst the most reliable in the world. Returning to Australia, the banks there have had far more problems with their payments infrastructure than the UK, despite having far lower transaction volumes.

New entrants today are able to use the Big Five's infrastructure. Whilst they may argue that the cost they pay is unfair and has little transparency as to the basis of  the charge, it is certainly a lot cheaper than building their own. In itself these costs are not the reason that holds back their success against the Big Five.

The biggest scale advantage that the encumbents have is  operating capital. This was most recently illustrated by the competition for the Verde branches that Lloyds Banking Group had been forced by the EU to dispose of following the state bail-out after the acquisition of HBoS. Whilst there are a not insignificant number of players who would like to enter or grow their footprint in the UK banking market such as JC Flowers, Virgin, Metro Bank and NBNK, they either weren't able to or were unwilling to raise the amount of capital required to become a significant player in the market. This situation has become further exacerbated since 2008 with capital being even harder and more expensive to find. To make the situation worse the amount of capital required to be held has been raised higher following the banking crisis. Here the established banks have a distinct adavantage as the requirement for capital is lower for them than for new entrants to the market. This is clearly a major barrier to entry.

Another significant barrier to entry for new entrants is the increased scruitny and additional regulation as a result of the banking crisis. This means that it takes longer and is far more difficult for any new entrant to get a banking licence and to get its executives approved to run a bank. This was one of the major hurdles that has held up the launch of Tesco Bank.

It is very convenient for politicians to blame the lack of competition for the Big 5 on free banking, however those politicians need to reflect on their own role in making it more difficult for new competition. The UK government wants to have a safer banking sector and in so desiring and by its actions has made it more difficult for new entrants.

Tuesday, 21 August 2012

Free banking didn't cause misselling




With the UK Parliament about to launch a major review of standards in banking, there is much talk of free banking being one of the problems that led to poor behaviour by the lenders. However the two issues are quite separate and there is no evidence that shows the two items are related.

One of the primary reasons behind the PPI (Payments Protection Insurance) misselling scandal was that the banks began to believe that they were retailers. As a consequence they started hiring retailers into the banks, people who had no understanding of either banking or the essential values of banking. Many of these retailers came in from white goods retailers where the model is to sell a product, be it a fridge, a television or a camera, at a highly competitive, loss-making price and then make all the profit from selling them an extended warranty on the product at a very high price and with high confidence that the customer will never claim on the insurance because they'll either forget they have it, not understand how to claim on it or what happens to their product will not be covered by the insurance. In this retail model there is absolutely no need or desire to build a long term relationship with the customer.

This retail model was launched in retail banking whereby mortgages, personal loans and credit cards were 'sold' to customers as prices that the banks were not making any money on. This was because there was so much demand for credit that wholesale interest rates rose and so much competition for customers that retail prices fell. As a consequence if a bank wanted to be in the retail lending space they needed to find another way to make money and this is where the retailers told their 'not so smart' banking colleagues about the secret of their success - extended warranty. Of course no banker worth his salt could allow the customers to realise that banking is essentially a simple business, so a more obscure, erudite, confusing name for the product had to be created and hence PPI was born.

Getting rid of so-called free banking is not going to change the ways that bankers will look for new ways to make money; that has been a fundamental characteristic of banking since the industry began.

However there has been a recognition amongst most of the banks that trying to emulate the retailers was a failed experiment. Retail banking is not retailing. Mass retailing is anonymous and transactional, it is not about building a relationship, it is not about the long term. Gone are the coffee shops in banks, gone are the branches that look like retailers and gone, hopefully, is the pile 'em high, sell them cheap offers from the banks. What needs to be ensured is that culture does not return and that the leaders of the retail banks are led by people who have a deep foundation of retail banking and live the values required for long term relationships.

Wednesday, 4 May 2011

Why the Big 5 banks should be pushing for the end of 'free banking' (and the government shouldn't)

With the ICB (Independent Commission on Banking) looking at increasing competition in the retail banking sector, examining the market share of the big banks and overall looking for greater fairness and transparency in charging, strongly supported by the likes of Vince Cable and other politicians, increasingly it looks as if the end of 'free banking' is in sight. Of course 'free banking' doesn't really exist, rather it is a mirage in that rather than paying directly for the services provided, consumers are made to pay by low or no interest rates for money deposited in current accounts, low interest rates in deposit accounts, high mortgage rates and even higher overdraft charges. As consumers baulk at the costs charged for loans and going overdrawn and politicians continually call for fairer, transparent charges, the inevitable conclusion is a banking system where customers pay for the services they use.

Being able to charge a direct amount for the services they provide would bring some significant advantages to the big banks in the heavily regulated environment that they are increasingly operating in. When there is more focus on the market share that each of the banks has, and where more market share is seen as bad, then the banks will want to focus not on the absolute market share but the quality of the market share.

All of the big banks today have customers that they don't make any money from. These will be the types of customers that open a current account for their household money, for their book club, for their children, where the balances are low, transactions sizes are small and they have only one product. If market share is going to be restricted then these are the customers that the banks are going to want to be shot of. The problem is that in today's banking environment it is very difficult for a bank to fire customers. However if customers were made to pay directly for the services that they use then it would be far easier for the banks to adjust their charges to either makes the low balance/low transaction value customers profitable or, better still for the banks, to encourage those customers to take their business elsewhere.

With four out of the five big banks now being run by investment bankers not retail bankers, and Barclays, HSBC and Lloyds Banking Group focussed on a strategy of raising their Return on Equity (ROE) up to at least the 14-15% range, then there is clear evidence that making customers pay directly for the services they use can help achieve this. In Australia where this model has existed for many years, The 'Four Pillars' (National Australia, Commonwealth Bank, WestPac and ANZ), have in the past enjoyed ROEs of 20+%. Even with tougher regulation they are each expecting ROEs of around 16%, significantly higher than any of the UK banks.

However whilst this all sounds very attractive for the big banks, it is not great for the new entrants, who will struggle to compete with the scale advantages that will allow the big banks to make their charges attractive for the customers they want. It also raises the big question of who will provide the banking services to the customers that the big banks don't want? It has the potential to significantly increase the number of the unbanked. As the likes of Vince Cable continue their crusade against the banks and push for ever more transparency of charging for banking services, the politicians need to be wary of the consequences of getting what they wish for.

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.

Friday, 3 December 2010

There's no such thing as free banking

John Varley, the outgoing CEO of Barclays, yesterday at the Independent Commission on Banking public meeting said that 'It is possible that free-if-in-credit banking is a structure that has outlived its time.' He described the concept as 'idiosyncratic by the standards of the world' and said it was worth examining.

This follows up the remarks made by the FSA Chairman Lord Turner that free banking damaged competition in financial services.

Whilst bankers may refer to 'free banking' and many consumers may believe that they have 'free' banking when in credit the reality is that banking is anything but free. All of us pay for our banking, but the charge is far from transparent. The fact that the banks either don't pay us for our credit balances or may pay a paltry 0.2%, but then lend out our balances to customers at much higher percentages is just one of the many ways that we pay for our banking services even when we are in credit.

Should the Independent Commission on Banking recommend the abolition of free-banking and the government implement their recommendation, then how would they make that work? Would they pass a law that organisations would be compelled to charge for cash withdrawals at an atm, for cashing a cheque, for paying a bill? A system where you pay for every transaction altready exists in Australia and has for some time, and to address Lord Turner's assertion that this will encourage more competition, there is an even higher concentration of market share amongst the Four Pillars (ANZ, Westpac, National Australia and Commonwealth Bank) than there is in the UK. Has the absence of free banking made that market anymore competitive than the UK - absolutely not. Indeed the Australians have their own commission on banking currently running that will report on its recommendations to create more competition in the Australian financial services sector later this month.

As a panacea to create more competition in banking the end of 'free' banking is not the answer. The only winners from the abolition of 'free' banking would be the banks. They are already actively encouraging more and more customers to pay fees for their 'value-added' accounts, as the banks look to boost the proportion of their income that comes from fees rather than interest, particularly when interest rates are so low.

Should the government persist in driving down that route, interfering with the free market by legislating the end of free banking (which is completely impractical), then consumers should be lobbying to ensure that the fees introduced are more than compensated for by the increase in interest that is paid by the banks for credit balances and the significant reduction in overdraft fees.