Open, vibrant competition has always been the ultimate safeguard of consumer interests. But it is an ingredient that has proved stubbornly elusive in the UK’s retail banking sector.
Ours is one of the most concentrated such markets in the developed world. In spite of a number of independent commission reports since 2000 which have sought to increase competition, just four players (Lloyds TSB, RBS, Barclays and HSBC) accounted for 65% market share before 2008’s financial crisis. That situation was compounded when, in the midst of the crash, the government negotiated the rescue of HBOS through the creation of Lloyds Banking Group, taking the Big Four’s share to 75% of the retail market.
In the aftermath of the crisis, genuine competition has been craved more than ever, not just in the interests of the consumer but as the most effective means of protecting the taxpayer from institutions deemed too big or interconnected to fail. Yet breaking the banking oligopoly has proved a tantalisingly tough task, with the risk of market entry to new players still far outweighing potential rewards.
In September, a new era of choice in British retail banking was heralded when an account switching guarantee was brought in, allowing the UK’s 49 million current account holders to change to a new provider in seven days. In principle this is a very promising development which will hopefully shake some life into a stagnant market. But we must ensure it does not become another false dawn. Formidable barriers remain for established, smaller players and new market entrants alike which will require radical action to counter.
Perversely, one of the greatest barriers to entry is customer satisfaction. Regardless of the antipathy towards the banking fraternity in recent years, customer research undertaken by reputable, independent research agencies typically shows good levels of customer satisfaction which make it difficult for smaller players to tempt customers away. An existing provider’s advantage is entrenched by the fact that two out of every three business start-ups choose their main personal bank for their business account. In addition, more than 90% of business customers use a single bank for all their needs – savings, current account, overdraft, debit card and loan. Since most business banking customers still use branch services – around 85% go into a branch for opening their account – those operators with extensive branch networks have a major entrenched advantage.
Starting an SME bank is expensive, complex and a regulatory maze, even for an organisation providing personal banking. An account system, internet banking, payment systems, ATM connectivity, branches, finance systems – all require substantial investment before the spiralling costs of regulation and compliance advice are even considered. In order to encourage new players, action will therefore need to cut the cost and complexity involved in market entry, reduce risk and make it easier to open an account.
I believe the cost of market entry might be much reduced if it were possible to link into a banking system that has already been built for, and implemented in, the UK market. The ability to buy or pay to use a proven system would mean that the cost to a new entrant would no longer include major IT development. While it is already possible to buy generic banking systems such as SAP, the cost of customisation in the UK remains high.
The time may be ripe, therefore, to copy the approach taken in the rail and utilities sectors by creating a common platform – a business that runs the infrastructure on behalf of all those offering banking services. RBS already provides partitioned computer systems that allow RBS, Nat West, Coutts and Ulster Bank to share the costs of IT infrastructure. Might we look at whether RBS, still 81% taxpayer owned, could be split into a bank and an infrastructure company that could offer services to other UK financial institutions? This principle could be extended to use RBS’s branches, or perhaps those of the Post Office, which could allow shared-use of facilities for deposits and withdrawals.
Beyond that, I would propose that we examine making account activity data more accessible so that new entrants may better assess the risk of credit loss. A similar approach might be taken to the sharing of fraud information. Inter-bank fora do exist that share this type of knowledge but they tend not to involve the sharing of data or predictive models. Similarly, we might look at encouraging banks to exchange information on identity checks. One of the barriers to new accounts being set up online is the problem of fraud. This again favours operators with extensive branch networks where a customer’s identity documents can be checked in person. Perhaps we could even compel banks to share with new providers any previous anti-money laundering (AML) checks they have conducted on customers. The jewel in the crown of such a shared technology platform would be to make the customers’ transfer of accounts from one bank to another virtually automatic.
Previous attempts to inject greater competition into the market have failed to crack Britain’s banking oligopoly. With the taxpayer still owning such a significant stake in two of the Big Four, the government inevitably also faces a major conflict of interest in encouraging competition while maintaining the value of that stake. But in the long term, it is firmly in the interests of both consumer and taxpayer that we get a much livelier retail banking market. The scale of that challenge and the disappointment of past competition initiatives dictates that fresh, inventive ideas may now be required – shared IT infrastructure, data and branches must be put squarely on the table.