Written evidence submitted by Cut Loose
INTRODUCTION
1. Cut Loose welcomes this inquiry as an important
further contribution to the debate on the future shape of the
banking industry.
2. Cut Loose supports measures to increase prudential
competition including the removal of barriers to entry and expansion
of the market.
3. In this submission, Cut Loose addresses the
issue of Direct Debit and Direct Credit transfers within the Account
Switching process as a barrier to consumers changing their banking
service provider.
ACCOUNT SWITCHING
4. The vast majority of accounts are switched
without any problems for the customer.
5. However, for every customer who is inconvenienced
there will be many who hear about the problems and decide not
to switch.
6. The personal risk that bills won't be paid
or salaries won't go to the correct account is at the heart of
customer concern when switching. The inconvenience and embarrassment
to the customer when payments going "wrong" is high
and customers run the risk of such an error negatively impacting
their credit reference score. Correcting these problems is time
consuming and frustrating for the customer.
7. These potential issues undoubtedly contribute
to the low level of account switching experienced in the UK, with
customers preferring to open multiple current accounts or simply
stay with their existing bank.
THE MECHANICS
OF ACCOUNT
SWITCHING
8. The industry has removed the need for customers
to write a new Direct Debit mandate to each service provider with
new bank account details. Instead, the new bank takes care of
informing the customer's service providers of the new account
details. This is a major improvement for the customer but they
can still have a problem with a Direct Debit payment if:
— (a) The
new bank is slow to request the customers direct debit and standing
order details from the original bank;
— (b) The
original bank is slow to send the information to the new bank;
and
— (c) The
service providers are slow to update their records in a timely
fashion to avoid charges being requested from the old account.
9. The customer is personally responsible for
ensuring remittances to their bank account by Direct Credit (eg
salary) are changed to their new account. This means they have
to write a letter to remitters with the new bank details, BACS
provides sample letters on their website.
— (a) The
customer is at risk of having a problem with a Direct Credit receipt
if the remitter is slow to change their records. Since the remitter
is frequently the customer's employer and primary source of income,
the outcome is potentially a real problem for the customer who
then has to both move the money to the new account and keep reminding
the employer to change their information.
10. The process of account switching is complex,
requiring timely information to be provided between:
— (a) the
customer,
— (b) the
original bank,
— (c) the
new bank,
— (d) the
customer's service providers who bill the customer using a direct
debit, and
— (e) the
customer's remitters who transfer money to the customer using
a direct credit. (eg employers).
— (f) This
is further complicated by the differing levels of back office
automation in service provider and remitter organisations. Small
organisations are likely to have manual processes to setup direct
debits and credits while larger organisations are likely to be
more automated.
11. The suggested timeline for the completion
of the switching process is currently around three weeks.
ACCOUNT NUMBER
PORTABILITY
12. In the evidence from Sir Donald Cruikshank
the possibility of changing to portable bank account numbers was
suggested as a possible solution, emulating his success in establishing
portable fixed and mobile telephone numbers in the Telco sector.
13. Whilst undoubtedly possible in the banking
sector, this would require a significant change to core processing
systems across the sector at a huge investment cost and would
not resolve the problem. All the banking systems in the world
rely on a "Sort Code" to identify the Bank that transactions
are sent to. The UK could not change this in isolation from the
rest of the world.
IMPROVING THE
CUSTOMER'S
SWITCHING EXPERIENCE
14. Cut Loose believes that further improvement
to the Customer's Switching Experience is both desirable and possible
in principle.
15. Cut Loose believes that the existing switching
process, provided through BACS and free to the customer, is efficient
and essential to ensure orderly transition from one bank account
to another.
16. The legal, compliance and processing considerations
that enable customers to benefit from the advantages of Direct
Debit and Credit transfers are borne by the banks, service providers
and remitters and must carry as much weight as the desire to make
account switching painless for the customer.
therefore
17. The solution must provide legal and compliance
protection for all the parties involved.
18. The solution must integrate with the current
process and avoid adding any additional onerous processes for
the customer, the original bank, the new bank and the service
providers and remitters.
AUTOMATED DIRECT
DEBIT AND
CREDIT REDIRECTION
19. Cut Loose believes that in principal, BACS
could be at the heart of a technical solution that would allow
a customer to switch accounts without the potential for transactions
to go wrong during the switching period.
— (a) At
the point of opening their new account the customer agrees to
all of their existing Direct Debits and Credits being redirected
to their new account.
— (b) As
part of the existing switching mechanism, banks submit a request
via BACS to the original bank to send details of the customer's
Direct Debits and Standing Orders. This request could be used
by BACS to set up a cross-reference holding both the old and the
new Sort Code and Account Number details.
— (c) When
BACS routes transactions, they check the cross-reference and if
it holds a new Sort Code and Account Number the routing is done
to the new bank.
— (d) The
new bank now receives all the customers Direct Debits and Credits
automatically. In effect an instant Account Switch is achieved.
— (e) The
rest of the Account Switching process is completed as it is today
to change all the information held at the service providers and
remitters.
— (f) The
new bank can track when the service providers and remitters have
made their changes and ultimately send BACS an instruction to
remove the customers cross-reference when it is no longer needed.
CONCLUSION
20. Cut Loose understands that the technical
development of the cross-reference by BACS is more complicated
than the principles outlined above imply. Nonetheless, we believe
this is achievable with a degree of effort appropriate to removing
a key barrier to Account Switching and therefore enabling increased
competition in the market.
ABOUT US
Cut Loose is a niche consultancy advising potential
new market entrants and helping existing banking organisations
to expand their offering.
January 2011
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