Competition and choice in retail banking - Treasury Contents


Written evidence submitted by Toynbee Hall

Toynbee Hall welcomes the opportunity to respond to the Treasury Select Committee's enquiry into Competition and Choice in the Banking Sector.

SUMMARY

—  The financial crisis has hit the most vulnerable the worst. It is these groups who see the strongly the negative impacts of financial instability.

—  Choice and competition in the banking sector is about promoting a fairer market. A tightening of affordable lending will have an ongoing negative effect on creating a banking system that is fair for all.

—  Creating the conditions for new entrants into the banking sector will have a positive effect on the market by introducing new suppliers; however the committee needs also to consider demand side policies.

—  Hidden bank charges are a problem for those who are already at the margins of the banking sector.

—  Moving away from free banking will hit those already in poverty worst, and will provide a disincentive for people opening bank accounts even when it is in their best interest.

1.  INTRODUCTION

1.1  Toynbee Hall is a charity based in Tower Hamlets that produces practical innovative programmes to meet the needs of local people, improve conditions and enable communities to fulfill their potential. Toynbee Hall works with over 6,000 members of the community each year to support them to meet the challenges that they face and to encourage them to take control of their lives.

1.2  Toynbee Hall has been a pioneer of financial inclusion work in the UK third sector for some years, and continues to develop services and projects to help improve the lives of people facing financial exclusion. Current projects include:

—  SAFE (Services Against Financial Exclusion) provides preventative financial capability training for organisations and their service users and problem-solving financial inclusion support for individuals.

—  Evaluation and Measurement develops methodologies and tools for measuring and evaluating levels of financial capability and inclusion and the impact of interventions designed to improve them.

—  The Illegal Money Lending Team provides supports to victims of loan sharks across London, through helping them to identify their financial/well-being priorities and supporting them to achieve them.

—  The London Strategic Financial Inclusion Champion is based at Toynbee Hall. The Financial Inclusion Champions are a national team of network-builders who support organisations to make links, share best practice and close gaps in provision around Financial Inclusion.

—  Transact, the national forum for financial inclusion, a network of over 1,000 organisations committed to practicing and promoting financial inclusion.

1.3  Our comments in response to the consultation are therefore focused on the impact of the proposals on financial inclusion, and have chosen to respond to those questions that we believe have a financial inclusion element.

1.4  The recent financial crisis will have an adverse effect on the everyday lives of the most vulnerable in society[47]. Those most vulnerable in society often do not have access to mainstream financial services and therefore suffer further from a poverty premium, when poorer households pay more for goods and services. Without a bank account, for example, a household will not be able to take advantage of the lower costs of their utility bills by paying through a direct debit[48]. If Britain is to be able to exit the recession in an effective way that will not cause further detriment to the vulnerable people in society, then it is important that there is a banking sector which caters for all in society in a fair and equal way. This will have a further positive effect on financial stability, by increasing consumer confidence in the banking sector lowering the chances of another run on a British bank[49].

1.5  Toynbee Hall welcomes the committee's interest in competition and choice in the retail banking sector. Effective competition in the banking sector permits consumers to actively engage in the market by switching to better offers. This drives firms to deliver lower prices and higher quality due to the risk of losing customers. Whilst on one hand effective competition is driven by the business model of banks, we would ask the committee to consider the other side of things: the relative weakness of consumers. This is especially the case when thinking about those who are understood as being "financially excluded"[50], that is those who currently do not participate in mainstream financial services. We would ask the committee to consider what effects choice and competition have on these more vulnerable groups to ensure that fair retail banking markets are created for all. This includes a consideration of the effects of changes in free banking for these groups.

2.  THE FINANCIAL CRISIS

2.1  The financial crisis has had a detrimental effect on consumer participation in the retail banking sector. This translates into having a negative effect on choice within the market. As a result of the financial crisis, banks have tightened the purse strings and lending to individuals has decreased[51]. This increases the chances of an individual of becoming financially excluded, because the high street will no longer lend to them. These individuals are forced to turn to door-stop lenders or loan sharks. Loan sharks target the most vulnerable and have been found to charge up to 825% APR on loans[52].

2.2  The threat on financial stability caused by the financial crisis also rests on the ability that markets have for working fairly for all consumers. Toynbee Hall would therefore welcome the committee giving attention to current campaigns that are seeing to address bank lending to individuals[53].

3.  DEMAND SIDE POLICIES ARE NEEDED FOR EFFECTIVE MARKETS

3.1  New entrants into the retail banking sector will be beneficial to mainstream consumers in that it will have a positive effect on choice and competition[54]. Toynbee Hall would like to the committee to consider consumers who are for whatever reason excluded from mainstream financial services.

3.2  The availability of choice in the retail banking market can be offset by the strong presence of consumer inertia. Evidence shows that consumers tend not to shop around for competitive deals on their bank accounts. In addition, consumers have concerns that the switch might be problematic. In 2008, the number of consumers found to have switched bank accounts in the previous 12 months was 6%; the lowest in Europe[55].

3.3  The other barriers to switching are not simply that the consumer does not want to switch, the problem is more that they are not able to switch. Evidence shows that a majority of low income consumers feel they do not have the knowledge to be able to switch bank accounts[56]. Or at least switching is sufficiently difficult enough for it to act as a disincentive.

3.4  Toynbee Hall considers inertia and the lack of financial capability to be significant barriers to creating a successful competitive market. Any policies around the development of fairer markets for banking therefore should consider demand side policies as well as supply side policies.

4.  FREE BANKING

4.1  Toynbee Hall welcomes the need for more transparency from banks when it comes to charges. There is a need to deal more effectively with unfair bank charges. Incurring bank charges acts as a disincentive to opening an account for many people on low incomes[57].

4.2  Consumers who are financially excluded are more like to feel the adverse effects of hidden bank charges. Through a combination of lower financial capability as well as not having the savings to recover from being overdrawn, these consumers are more likely to incur them.

4.3  Furthermore, these charges often outweigh the benefits for many people in holding a bank account.

4.4  Toynbee Hall are concerned, however, that if customers are charged for holding a current account, this will provide a disincentive for the financially excluded to enter into mainstream financial services; therefore making those who are not included into mainstream financial services, more vulnerable to the pitfalls of financial exclusion

RECOMMENDATIONS

—  A retail banking sector needs to be set up in which they create the condition for a fair service to all consumers. For those who cannot access mainstream affordable credit, there should be viable options for these people to turn to. We would therefore recommend the continuing support of CDFIs in order to ensure the existence of viable alternatives.

—  We recommend the consideration of how demand side policies can have a positive effect on creating a fairer banking sector. Improved financial education, targeted at those who need it the most, should be provided to increase the knowledge and skills needed for all consumers.

—  We recommend that further research be conducted to look into the effect of banking charges on low-income groups.

September 2010


47   http://www.esrc.ac.uk/ESRCInfoCentre/about/CI/CP/Our_Society_Today/economists/RecessionBritainPublication.aspx Back

48   http://www.savethechildren.org.uk/en/docs/poverty_briefing.pdf Back

49   http://news.bbc.co.uk/1/hi/business/6996136.stm Back

50   http://www.fsa.gov.uk/pubs/consumer-research/crpr03.pdf Back

51   http://www.guardian.co.uk/money/2010/aug/31/mortgage-lending-plunge-july Back

52   http://www.guardian.co.uk/money/2010/jan/15/loan-sharks-poorest-households Back

53   http://betterbanking.org.uk/ and http://www.londoncitizens.org.uk/pages/pdfs/Press%20Release.docx Back

54  http://www.oft.gov.uk/shared_oft/reports/financial_products/OFT1005.pdf, pp24-54 Back

55   Ibid, p85 Back

56   Ibid, p106 Back

57   http://www.jrf.org.uk/sites/files/jrf/2222-financial-exclusion-policy.pdf, p26 Back


 
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