UK retail bank reform: a road to nowhere?
Developed under the auspices of the UK Payments Council, the seven-day switching plan is the pride of Adrian Kamellard, chief executive. In June, the Council made public its Current Account Switch Guarantee and Trustmark, which effectively promises consumers that their account will be freely and safely switched within seven days on the date the customer wants.
The switch encompasses all payments going out, such as direct debits, and all those coming in, such as salary. For 13 months the new current account provider will arrange for payments accidentally made to the old account to be automatically redirected to the new account. If anything goes wrong with the switch, as soon as it is told the new provider will refund any interest and charges arising from a mistake.
“Our switching guarantee will remove the mystery from moving to a new bank,” Kamellard told Banking Technology. “It is also massively quicker. Our research showed that customers haven’t understood what to expect when choosing to switch, and that was a barrier to moving. Seven-day account switching will help to increase competition and inspire better service for consumers.”
The account switching service will be supported by an advertising campaign on national television, in magazines and other media to raise awareness among the general public. In total, £750 million was invested into the project and its associated advertising campaign, according to Payments Council figures.
Turn left here
Some banks are in favour of the new service. Metro Bank, which opened its doors in 2010 and is one of the most widely known ‘challenger banks’ in the UK, is currently in phase-three testing for the seven-day account switching service. Metro Bank was the first new bank in the UK for a century when it launched. It now has a network of 19 stores in London and the southeast of England.
“We believe this service is great for the customer and great for us,” said David Young, head of direct channels at Metro Bank. “There needs to be more competition in UK retail banking. We don’t see the account switching deadline as a burden, we’re seeing it as an investment for the future.”
However, other financial institutions have been much more critical of seven-day account switching, on the grounds that it may make little difference to the end consumer while simply adding cost for existing banks.
“Account switching is an expensive and unnecessary way to not achieve the objective, which is to increase competition,” said one senior business development manager at RBS who preferred not to be named. “The real problem is there’s virtually no difference between current accounts. It would be better to end this ridiculous free banking model in the UK and have customers pay a fee; at least that would allow for differentiation between retail banking services.”
That view is shared by Alex Kwiatkowski, research manager, EMEA banking, IDC Financial Insights, who questions the entire premise of whether faster account switching would make consumers more likely to switch their bank – and whether or not more regulation is a sensible or even sane policy given the existing strong demands of multiple regulators across the globe to meet regulations such as Basel III, Dodd-Frank, EMIR, MiFID II, AFMD and FATCA.
“Bank technology is reeling from being squeezed too much and doing things it was never designed to do,” he said. “It’s often a hotchpotch of different systems, sometimes going back to 1980s-style green screens. A lot of work will be needed to hit this target, but the truth is there’s so little variety between current accounts right now it hardly matters. The industry is spending hundreds of millions, even billions and trillions for regulation, yet it just creates yet another set of problems. Do we need seven-day account switching? No. Have they added up the cost? No. Can we afford it? No. Don’t rock the boat.”
The Payments Council insists that making the actual switch easier will unlock the competitive potential behind consumer demands, by inspiring banks to offer more. It also stresses that account switching should be considered alongside the Mobile Payments Service, which is due to launch in spring 2014. The two schemes are expected to create “fundamental changes” in consumer behaviour, driving up adoption of new technology and prompting new competitive options for banks and their customers, according to Kamellard.
“There’s a lot of evidence that banks are looking at seven-day account switching as an opportunity to differentiate and launch new products – even looking around at the advertising by banks on the London Underground in recent months, the difference is already becoming palpable,” he said.
However, according to Kwiatkowski the entire scheme is a politically motivated attempt by politicians to grab votes by wielding bank-bashing rhetoric, without any serious consideration of the implications.
“We are supposed to be building a retail banking ring fence in the UK, but nobody knows how it works,” he said. “Where will it all stop? Banks are being expected to lend more to businesses, invest more in their IT and provide a better service, and to cut back on risk and save more. You can’t have it both ways at once. The truth is that seven-day account switching is an unhelpful distraction that is being implemented without consideration of the time and cost it will take to get there.”
From a customer perspective, a YouGov poll conducted by BT at the end of February revealed some of the factors that would most compel customers to switch their current account to a rival provider. The survey discovered that strong online banking services, the presence of a local branch and 24/7 availability of banking services were the strongest motivating factors that would persuade a customer to change banks. Peer review sections, web chat and compare my bank services were the most wanted tools that customers lack.
Roadworks ahead …
Regardless of whether or not account switching as it stands is a good idea, industry commentators seem to agree that more will need to be done if the Payments Council’s objective to increase competition is to be met. Metro Bank has set out its own recommendations for encouraging competition in UK retail banking, which include a call for the creation of a new independent payments regulator, and for payment systems to be removed from a bank’s internal mechanisms and replaced with an independently run payments platform for banks.
“The current system of ‘agency banking’ means that not only are existing banks able to charge discretionary fees to new banks to process their transactions, but that new banks are dependent on the service levels and IT systems of existing banks for their transactions,” said Metro Bank in an official statement. “Transactional services should be made independent, and run by an independent payments regulator.”
Such a step is also currently advocated by elements within the UK government. Andrea Leadsom, MP and member of the UK government’s Treasury Select Committee called in June for the creation of a shared payments infrastructure into which many core bank functions would be placed – a suggestion that is also currently being discussed at the EU. It is also advocated by the Payments Council, which included this among six possible scenarios in its future of payments roadmap, published in June.
However, opponents of a shared infrastructure suggest that it may cost more than it is worth – and end up harming the very firms that it is intended to help. In particular, the proposal to create an agency utility for agency banks has been criticised for undermining the choices available to small businesses, including challenger banks.
“Smaller players may have obtained a good deal below cost from a larger bank,” said Gareth Lodge, senior analyst, corporate payments at research firm Celent. “Why force them to use a utility, potentially at higher cost? New entrants are held back because UK retail banking is a mature market with low profit margins, not because it is difficult to access payments. It’s ridiculous.”
Existing regulations have also come in for attack for their potential to undermine competition – including some in unexpected areas. In its recommendations to the regulator, Metro Bank pointed out that planning restrictions may be holding back new entrants in the UK. The bank claims that the Use Classes Order 1987 obliges new banks to spend “significant” time and money applying for planning consent from local authorities if they wish to open in a prime retail location. A recently-announced two-year window provided by the Department of Communities and Local Government is nowhere near enough to resolve the problem, added the bank.
In addition, Metro called for the creation of an industry standard for capital and liquidity levels, with regular reviews of new bank levels to ensure that capital and liquidity burdens on new banks are “not excessive but proportionate to the risk” being run. Both requests are essentially directed at making sure there is a common legal and regulatory framework for all banks.
“A competitive market will only be achieved when new and existing banks face a level playing field; where it is the offering and proposition of the bank that leads to differentiation,” said Craig Donaldson, chief executive at Metro Bank. “Currently, new banks face obstacles not just to launch, but to access the same opportunities, capital requirements and deposit sources as existing banks. We look forward to the Government’s action to create a better banking system.”
Despite the fact that over 80% of UK current accounts are held by just four big providers, some competition undoubtedly does exist in UK retail banking. Several new banks are hoping to capitalise on dissatisfaction with existing offerings to enter the market in coming months. Finnish bank Holvi is an online-only bank that aims to rollout across Europe by the end of the year, offering a combination of personal financial management features, social and business networking and reworked core products. Meanwhile, Moven (formerly Movenbank), another online service, is based around the mobile wallet concept, in which the customer downloads a mobile app and then uses their mobile phone to make payments, transfer funds and withdraw cash.
The new banks also do things differently from other large competitors in some immediately tangible ways. Metro Bank for example differs in the opening hours it keeps. Metro branches are open from 0800 to 2000 on weekdays; the bank is also open on Saturdays and Sundays until 1800 and 1700 respectively. By comparison, a typical HSBC branch in London’s Zone 2 is open from 0930 to 1630 on weekdays, and is not open at all on Sundays. Metro says that it operates retail hours, not banking hours.
However, plans are afoot to take things a stage further by promoting competition through more radical means.
You take the map
Last month, the UK Payments Council published its payments roadmap. The document was a landmark publication for the council, setting out six options designed to cover both the coming three years, and the next decade. The roadmap suggests the creation of a central clearing hub, consisting of two or three payment clearing engines, one for high-value payments, one for instant payments and one for batch processing of direct debits or payroll transfers; it also proposes to create a centralised banking utility, which would cover current accounts, collaborative clearing and data and service management.
These proposals have also attracted mixed responses, including strong criticism from some quarters on the grounds that they too could undermine competition.
“Banks are already struggling to compete, and bringing even more of their systems onto the same platform is likely to further reduce competition and provide even less differentiation and therefore even less reason for customers to switch their current accounts – a situation which is contrary to the basic objectives of the Payments Council,” said Lodge.
That is a view shared by the senior account manager at RBS, who suggested that moving so many bank systems onto a common platform erodes the ability of any of the major competitors in the UK market to differentiate themselves.
“This is a step in the wrong direction,” he said. “We need to be competing with separate systems, not herding everyone onto a central platform which will then shackle the entire banking industry and force everyone to run at the speed of the slowest horse.”
Kwiatkowski at IDC Financial Insights commends the Payments Council for its efforts to lay out a possible future course for UK payments, but warns that the problems facing the industry are too deep to be solved by any single initiative – including account switching.
“The payments council roadmap is a good start at opening up some of the issues,” he said. “But you have to remember, faster account switching won’t stop the rot at the heart of banking. We had a few changes over the last five years but that’s not enough – if you put a saddle on a cow, it doesn’t make it a horse. The rot is culture, and you can only change that slowly over decades. No other country has a plan like this [seven day account switching], and I think that says a lot.”
Seven-day account switching will come into effect in the UK in September; a final date had not yet been set at time of going to press. The first full version of the UK Payments Council roadmap will be published in Q1 next year, following a period of consultation with government, business, charity and consumer representative groups.