Select Committee on European Scrutiny Twelfth Report

1 Competition: retail banking



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COM(07) 33

Sector Inquiry under Article 17 of Regulation (EC) No 1/2003 on retail banking (Final Report)

Legal base
Document originated31 January 2007
Deposited in Parliament8 February 2007
DepartmentHM Treasury
Basis of considerationEM of 21 February 2007
Previous Committee ReportNone
To be discussed in CouncilNot known
Committee's assessmentPolitically important
Committee's decisionFor debate in European Standing Committee


1.1 Under Regulation (EC) No 1/2003 on implementation of the competition rules in Articles 81 and 82 EC the Commission may conduct an inquiry "into a particular sector of the economy or into a particular type of agreements across various sectors" if "the trend of trade between Member States, the rigidity of prices or other circumstances suggest that competition may be restricted or distorted within the common market".

The document

1.2 Retail banking, which is defined by the Commission as including banking services to consumers and small and medium enterprises (SMEs), remains the most important sub-sector of banking, representing over 50% of total Community banking activity. The Commission has estimated that in 2004 retail banking activity in the Community generated gross income of €250-275 billion (about £172-189 billion), equivalent to approximately 2.0% of total EU GDP.

1.3 A number of factors such as market fragmentation, price rigidity and customer immobility suggested to the Commission that competition in the Community's retail banking market does not work effectively and it decided in June 2005 to open an inquiry under Regulation (EC) No 1/2003 into the retail banking sector, in particular in relation to cross-border competition. The Commission looked at two complementary aspects — the payment cards market and the markets for current accounts and related services. Interim reports on these two aspects were published on 12 April 2006 and 17 July 2006 respectively.[1] This document is a Commission Communication covering the final report on the inquiry, DG Competition Report on Retail Banking Sector Inquiry. In large measure the document suggests, after examining potential problems, how the Commission itself, Member States, National Competition Authorities (NCAs) and the retail banking sector could strengthen competition in retail banking through competition law enforcement and regulatory and self-regulatory measures.

1.4 The Commission's report examines and discusses the context for its conclusions under two headings:

  • competition in the market for current accounts and related services, including market characteristics of retail banking in the Community, market structures and financial performance, credit registers and banking competition, cooperation, setting of policies and prices and customer choice and mobility; and
  • competition in the market for payment cards and payment systems (that is account-based money transfer systems) — including cashless payments, a single market for payment services, point-of-sale card payment systems, market concentration and integration, cardholder fees, merchant fees, interchange fees, profitability of the payment cards industry, free funding periods for payment card transactions, membership and governance rules, cross-border competition in "acquiring" (that is providing card acceptance services to merchants), payment infrastructures and multilaterally agreed interchange fees for ATMs and for non-card payments.

1.5 The Commission says that inquiry has identified symptoms suggesting that competition may not function properly in certain areas of retail banking and has confirmed that markets remain fragmented along national lines, including in retail banking infrastructures such as payment systems and credit registers, meaning that integration is far from complete. Amongst the points the Commission notes are:

  • market structures differ considerably among Member States in terms of both the degree of market concentration and the identity of leading players;
  • key aspects of the infrastructure for retail banking remain fragmented both on the market side (clearing and settlement systems and credit registers (of financial information on individuals)) and on the legal side (tax policies, regulation and consumer protection regimes);
  • significant barriers to entry exist from economies of scale, the branch network and consumer immobility through to regulatory barriers such as prudential rules used to block cross-border mergers or acquisitions and behavioural barriers, resulting from incumbents' behaviour;
  • information asymmetry (that is where customers lack or are unable to act on full information), low price transparency, high switching costs, and product tying (that is two or more products sold as a package when at least one of these products is sold separately, thus forcing a customer to buy products not necessarily wanted in order to obtain a specific product) are factors, common across all Member States, which reduce consumer mobility;
  • distribution models for retail banking products vary to some degree across Member States and according to the product being sold. Whilst the branch network remains the primary channel, especially for "full-service" retail banking, it is increasingly complemented or substituted by other means such as telephone or internet; and
  • while the scope of direct state intervention in the retail banking sector has narrowed, Member States continue to intervene in several ways, from the promotion or preferential treatment of certain bank types to the prevention of cross-border market entry. But NCAs have been becoming increasingly active in the retail banking sector and regulators at Member State and Community level increasingly encourage self-regulation to deliver market-efficient outcomes.

1.6 On current accounts and related services the Commission draws particular attention to three competition concerns:

  • on credit registers, with respect to unfair access conditions, partial data sharing and regulatory barriers;
  • savings and cooperative banks traditionally have had close ties (for example they often run their own payment infrastructures, have joint risk management and protection scheme for deposits or have a common business and marketing strategy) which may appreciably restrict competition either between themselves or in relation to other actual or potential competitors; and
  • in relation to the prices and policies of banks, information asymmetry, administrative burdens, low price transparency, product tying and closing charges combine to enhance switching costs thereby reducing consumer mobility. Immobile consumers in turn weaken competition by enhancing banks' market power to set higher prices and creating a barrier to entry to new entrants hoping to provide full service retail banking.

1.7 The Commission's main findings in relation to competition in the market for payment systems are:

  • payment card fees vary significantly across Community markets, which may suggest the presence of competition barriers. It focuses on interchange fees — the inter-bank fee paid to the card issuer (the bank that issues the payment card) by the card acquirer (the bank that provides card acceptance services to the retailer) for each card payment transaction. The Commission finds that interchange fees magnify card issuers' profits and that the setting of interchange fees may be subject to the exercise of market power. Preferential interchange fee arrangements between local banks may also raise barriers to entry for foreign banks wishing to join card schemes. It notes an ongoing debate about how far interchange fees are indispensable to enable the efficient operation of payment card networks;
  • the Commission finds that some membership rules and governance arrangements may create barriers to competition in payment card markets. In particular, most card schemes restrict participation to credit institutions or organisations controlled by credit institutions. High membership fees may dissuade new entrants from joining schemes. Certain governance arrangements, such as the obligation on some members to provide business-sensitive information without reciprocal data sharing may distort competition between the member banks; and
  • in relation to payment systems other than payment cards the Commission says systems are not integrated and their organisation and structures vary significantly. This means that a bank operating in different Member States must adapt to different national systems. Operators of clearing systems may create further barriers to market entry, for example most clearing systems only admit banks. High joining fees may also act as a barrier to competition. Interchange fees for credit transfer and direct debit may also distort competition.

1.8 The Commission concludes that the sector inquiry has identified four key issues that will need to be followed up by it and the NCAs:

  • the design and operation of payment systems, including card payment systems;
  • credit registers;
  • cooperation between banks; and
  • the setting of banks' prices and policies, including product tying.

The Government's view

1.9 The Economic Secretary to the Treasury (Ed Balls) comments first in relation to current accounts and related services, noting that the key point of relevance to the UK competition authorities, the Office of Fair Trading (OFT) and the Competition Commission (CC), concerns the findings on the setting of the prices and policies of banks, that is product tying, bank charges and consumer mobility issues, and saying that all of these issues are being addressed in one form or other. But he adds that the OFT and CC will be considering whether there is any more that should be done following the Commission's inquiry and that his department has made a number of suggestions in relation to these issues in its response to the review of the Banking Code.[2]

1.10 On product tying the Minister comments further:

  • in 2002 the CC investigated the supply of banking services to SMEs and found evidence of "complex monopoly" among the main UK clearing banks;
  • in order to strengthen competition and improve the ability of SMEs to switch, the CC recommended several shorter-term transitional undertakings along with longer-term behavioural measures;
  • the latter included measures to limit the tying of products such as loans and current accounts;
  • in autumn 2002 the main UK clearing banks undertook not to directly or indirectly require SMEs to open or maintain a current account as a condition of the granting or maintaining of a loan or deposit account;
  • the OFT has recently completed its review of the SME market. It still believes that longer-term behavioural remedies are necessary as switching rates are still low;
  • it is likely that the OFT will advise the CC to discontinue transitional price-controls but to continue with the longer-term behavioural remedies. The CC should publish its provisional decision by the end of April 2007;
  • the OFT will also think about building longer-term behavioural remedies into the Banking Code review; and
  • there is currently no work on product tying in the personal current account market.

1.11 On bank account default charges the Minister says:

  • the OFT launched a fact-finding exercise following its press release of 7 September 2006 noting that the principles applicable to credit card default charges were applicable to bank account default charges;
  • the OFT will not consider whether a further detailed investigation of the fairness or level of individual bank default charges is needed or what solution, market-led or other might be require until the end of this exercise in March 2007; and
  • the UK's "free-banking/cross-subsidisation model" lies at the heart of what the OFT is tackling in its current account default charge inquiry (and its related work on credit cards and payment protection insurance). This pricing model is inherently opaque and therefore creates the potential for abuse in terms of pricing and selling practices.

1.12 Turning to issues of consumer mobility the Minister tells us:

  • the CC will shortly be reporting on its proposed remedies to tackle the competition issues in the personal current account market in Northern Ireland;[3]
  • as solutions to improve consumer mobility (by improving transparency and switching) dominated the CC's draft notice of possible remedies, the OFT is keen to wait for the final publication, which is expected in Spring 2007;
  • the OFT will be considering the most appropriate mechanism, for example self-regulatory measures such as the Banking Code review, to implement measures to tackle switching costs thereby enhancing consumer mobility; and
  • it should be noted that any changes to the Banking Code as a result of the Northern Ireland inquiry would apply equally throughout the UK.

1.13 On payments systems the Minister notes the Commission says that antitrust enforcement action may be appropriate to address several of the competition issues identified in the document, including discriminatory access and governance arrangements and interchange fees in some payment card schemes, and that any enforcement action would proceed in consultation with the NCAs. He says that:

  • the OFT published a press notice on 22 February 2007 emphasising that the governance of major card schemes operating in the UK is primarily at Community and international level and that, while the Commission is keeping access and governance arrangements of payments under review, the OFT will not undertake further work on this; and
  • the Commission and the OFT are currently undertaking separate enforcement action relating to European and UK interchange fee arrangements.[4]

1.14 Also the Minister reminds us that the draft Payment Services Directive aims to deliver a Community internal market in payment services, including credit and debit cards. The proposal would harmonise the regulatory regime across Member States and introduce a new Community-wide licensing regime for non-bank payment service providers. A Payment Services Directive would also support delivery of the industry-led Single Euro Payments Area (SEPA) initiative, which is intended to enable efficient cross-border payments in euros within the Community. The Minister adds that the Government supports a Directive that would increase competition in the payment services market.[5]


1.15 This document discusses issues of importance and topicality to consumers, both individuals and SMEs, of retail banking services. We recommend it for debate in European Standing Committee so that Members can examine further the Commission's findings and the Government's practical responses.

1   See . Back

2   See . Back

3   See . Back

4   See  Back

5   (27104) 15625/05: see HC 34-xvi (2005-06), para 8 (25 January 2006), HC 34-xxxii (2005-06), para 6 (21 June2006) and HC 41-iv (2006-07), para 16 (14 December 2006). Back

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