The decline of trust in the banking industry and wider financial services is one of the most significant crises in modern business. Small businesses are finding credit hard to come by, taxpayers are angry at the billions spent on the bailouts, products have been mis-sold and indicators manipulated, pay for bankers is often unrelated to performance, and customer service levels are poor.
Much has been made of the regulatory shortcomings that have contributed to these problems. Little attention has been directed at the competitive environment itself. Yet a competitive market is one of the best ways to ensure these problems are not repeated.
Changing the rules of the game
Providing the environment to enable full and instantaneous bank account number portability would be a game changer in UK finance. It should be as easy for someone to change their bank account as it is their mobile phone provider. Only full bank account number portability (ANP) would make this a reality.
The Treasury launched a consultation looking at the UK payments systems with a view to encouraging greater competition and consumer choice. The response states the government will establish a payments regulator with the power to promote competition, innovation and benefits for customers. This should pave the way for ANP.
Enabling personal and business customers to switch instantly would be a huge boost for consumer choice. It would dramatically improve the competitive outlook in UK banking, encouraging new entrants and product innovation.
Cultivating a climate for consumer choice
The Independent Commission on Banking (ICB), led by Sir John Vickers said in its final report (PDF): "Without consumers being willing to switch between competitors, banks have weak incentives to provide better offers."
Yet there is a switching rate of just 3.8% for personal current accounts in 2010, 51% of small to medium-sized businesses have never switched their main banking relationship and 85% of businesses surveyed by the Federation of Small Businesses have not switched their main banking provider in three years, according to the ICB.
These switching rates compare unfavourably with other industries. In 2010, for example, 26% of consumers switched telephone provider 22% changed insurance provider.
The market is not adequately producing competition.
An idea whose time has come
At a roundtable discussion in the House of Commons on 13 September 2012, representatives from the Bank of England, Lloyds, RBS, Barclays, HSBC, Virgin Money, the Treasury select committee, the Payments Council and others discussed the idea of ANP.
Former RBS chief executive Stephen Hester sent the following message to participants: "The principle should be that if a customer wants to leave or join us, unreasonable obstacles should not be put in their way."
Following that event, Which executive director Richard Lloyd said: "One of the most important ways that consumers can influence the broken banking culture in this country is by voting with their feet and switching to another bank."
The advantages of ANP
In 2000 there were 41 major British banking groups and subsidiaries, in 2010 there were just 22. Four banks have an almost 80% market share of the personal current account and small and medium enterprise lending market. There is evidently a need for genuinely comprehensive action.
The government should aim for full ANP in the next decade. Banks would need to establish a clearing system in common, which would hold all bank accounts with an identifying code to establish which commercial bank has the account.
The policy would have several benefits. The ability to retain their account number would make it easier and more attractive for customers to change provider. The possibility of almost instantaneous switching would result in much greater competition between banks. Any newly authorised bank would be able to buy a licence to use the system, which would be a boost to challenger banks.
Accounts could be easily transferred from failed institutions to sound ones, which set in the context of a future financial collapse or potential run on a bank is obviously an additional massive plus as it would obviate the potential need for a bailout.
From theory to practice
Intellect, which represents the UK technology industry, outlines how the system could work in its recent report Biting the Bullet. In effect, all account information relating to a specific individual or business will "hang" from a unique identifier – a portable number that will be retained by that individual or business on an ongoing basis. Intellect suggests that the costs of the system could be borne by a small annual subscription from each account holder, making the barriers to action low.
It is encouraging that the government seems to acknowledge that this is a road we need to take. Full ANP would be good for the consumer and good for challenger banks.
It would also be good for established banks. They should have nothing to fear from it being easier for customers to switch. A sector that currently lies at rock bottom in public opinion would be able to thrive, responsibly, as it has not done for some time.
• This article is an edited version of a piece published in the Virtue of Enterprise: Responsible business for a new economy, a ResPublica essay collection arguing for business to be more responsive to social and consumer needs in a new era of accountability and transparency
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