Mixing up the pieces
Back in the 1980s, the late Douglas Adams, author of The Hitchhiker’s Guide to The Galaxy, collaborated on a computer game, the object of which was to get a bank to acknowledge a change of address.
The frustrations of dealing with bureaucracies since then have worsened, and in an increasingly digital world, are only likely to continue in that direction.
So the UK Government is probably to be applauded for trying to simplify one aspect of modern life: changing your bank. As of September this year, UK retail banks will be required to offer a seven-day account switching service.
Currently, according to the Payments Council, which is in the driving seat for the initiative, the “best time” for successfully switching between banks is 18 days.
Essentially, from September a consumer who wants to move bank for some reason or another, will select a new bank, which will give them details of the new account that they can give to their existing bank. Seven days later, all of their accounts, standing orders, direct debits, and suchlike, are up and running at the new bank without any interruption.
There are some obvious pitfalls: what happens to incoming payments to the old bank account? For how long do they have to forward such things – in other words, how much data on a former customer should they be keeping? What are the data protection implications?
To take a concrete example, if a person receives a regular annual payment – a pension, company dividend or royalty cheque for sales of their computer games, for instance – at what point does the former bank stop having responsibility for passing on the money? The recipient may even have forgotten about the payment.
There are less obvious pitfalls, one of which is that anti-bank groups could organise flash mob-style groups, creating (potentially) disruptive spikes of activity and generally being a nuisance. (And while it might be some fun to mess around with a big bank, what if they all decide to move to a small building society, for instance? Innocent bystanders could suffer …)
More importantly will the change actually do what it was intended to do? Simplifying the lives of consumers by removing bureaucracy is only a side benefit: the point is to increase competition among the UK’s High Street banks.
The signs are not that good. Some banks are clearly going to make a play to encourage customers away from rival banks – some are already, with Nationwide advertising its mutual status, and the newcomers Metro and Virgin Money promoting their services. Once the service comes online we can expect to see more of this sort of competition.
Whether it will make any real difference is a moot point, suggests a recent study, Simon-Kucher & Partners, a strategy, pricing and marketing consultancy, asked current account holders which brands they would consider moving their current account to. They found that while more than one third (37%) would consider switching to a ‘challenger’ brand as a result of seven-day switching, the vast majority – 73% – would consider moving to one of the established Top 5 banking brands.
In other words, although the study found customers showing strong interest in the challenger brands and mutuals, the big banking brands will maintain their dominance
Among the challenger bank brands Virgin Money is most popular, despite having just over 70 UK branches since acquiring Northern Rock’s estate. Supermarket brands also proved popular. The top four brands that would attract current account customers are:
- Virgin Money
- Tesco Bank
- M&S Money
- Sainsbury’s Bank
According to the study, The Co-op Bank, Nationwide and HSBC are set to become net beneficiaries once the Seven-Day Switching service goes live and switching rates increase. It is these brands that have the greatest relative appeal compared with their current market shares. Previous research from Simon-Kucher estimated that nearly half of UK current account holders are likely to consider moving bank, and realised switching rates likely to grow to 6-12% (see panel).
Ben Snowman, director and study author said: “The dominance of the Big 5 is set to be challenged by more competition on the high street and the greater ease and speed of switching. Whether their dominance is simply dented or substantially reduced, remains to be seen.”
The seven-day switching service should perhaps be seen in the context of wider changes that are being made post-crisis, and in the wake of taxpayer bail-outs of banks. UK Chancellor George Osborne has talked of a wider opening of the UK payment infrastructure, though without any detail, and the Payments Council is possibly to be replaced by another body – perhaps with statutory powers, but certainly less bank-friendly in the eyes of politicians and the popular press.
Loyalty at a price
Almost half – 49% – of UK current account holders are likely to consider switching their account as a result of the seven day switching regulation coming into force in September.
Realised switching rates are likely to grow from a current level of between 2.5% and 5% to between 6% and 12% as a result of perceived benefits, according to a study by Simon-Kucher & Partners, a consulting firm specialising in pricing and marketing
The study questioned over 1,000 current account holders, finding that the number of participants likely to consider switching their current account increased from 19% to 49% due to the benefits arising from seven day switching. The main reasons why they are more likely to switch include:
- Speed and simplicity (83%)
- Assurance of accurate migration of direct debits and receipt of salary payments (83%)
- Ease of trying another bank (73%)
The good news for banks is that the survey suggests they can stem switching rates by incentivising current account holders to stay. Current account holders will respond to the right incentives.
Online banking is the main feature that attracts current account holders when looking for a new bank when deciding to switch, followed by the ability to transfer all regular payments. Introductory bonuses for switching are also a highly popular feature. This is currently being promoted by banks; First Direct now offers £100 to new current account customers.
The main incentives cited by the survey respondents were:
- One-off gift up to £100
- A better interest rate on savings account
- A better interest rate on current account balance
These incentives would serve to retain 86% of those who would consider switching their current account.
“Banks need to develop propositions to retain current account holders as there will be an increase in switching rates,” said Jens Baumgarten, banking partner of Simon Kucher. “There are opportunities for banks to understand the price of loyalty in order to retain these customers and protect their market shares.”
“We agree with the Chancellor that ‘payments systems sit at the heart of the banking system’”, said Adrian Kamellard, chief executive of the Payments Council. “I am determined that the Payments Council will continue to deliver positive change for the benefit of customers. We recognise the critical need for continuing innovation and vibrant competition, including easy access to payment systems for new entrants. This is why we are focusing on developing a payments strategy that meets the needs of customers, the economy as a whole and satisfies any new regulatory requirements. Examples of what a good strategy can deliver include our new account switching service and mobile payments service.”
Kamellard said that the new service “will make switching accounts simpler, faster, hassle-free and will be backed by a cast-iron customer guarantee”. The Payments Council will also be running a national TV advertising campaign to make sure everyone is aware of the change. “We are confident this will increase competition in the market for new and existing current account providers and increase customers’ confidence in the switching process.”
The hypothetical changes foreseen by Osborne and others are not without dangers, say observers. “Banks payments are an essential service, like electricity or telecommunications. We take them for granted but the impact is immediate when things go wrong,” said Stephen Ley, partner in banking and payments risk services at Deloitte. “Innovation in the highly-connected banking and payments world takes time because of the scale and expense of any change and the extreme penalties for getting it wrong. Despite these obstacles, the market is changing fast. 2014 will see the launch of m-payments across the UK which, combined with the UK’s leading Faster Payment service, will enable payment to be sent via a mobile number in near real time 24-hours a day 365 days a year. The new payments regulator will need to carefully balance the desire for more competition and innovation with consumers’ needs for resilience, reliability and security.”