Banking StandardsWritten evidence from Andrea Leadsom MP

FULL BANK ACCOUNT PORTABILITY

Summary

People have lost faith in the banking industry: small businesses are finding credit hard to come by, taxpayers are angry at the billions spent on the bailouts, pay for bankers is often unrelated to performance, and customer service levels are poor.

A lack of competition in UK retail banking has contributed to this situation. It should be as easy for someone to change their bank account as it is for them to change their mobile phone provider. Only full account portability would make this a reality—the seven-day system of switching advocated by the Payments Council and endorsed by the Independent Commission on Banking would not.

Seven-day switching should be part of the journey towards full-account portability. It should be supported to provide a quick-fix to some of the problems. And the government should announce now the intention to introduce full account portability with a long lead time, to tie in with the timetable for the retail ring fence.

Consumer Choice

Giving personal and business customers the ability to switch instantly would be a massive boost for consumer choice.

Bank Competition

Full account portability would be a radical and long overdue shake up for the competitive outlook in UK banking—new entrants would be encouraged as would product innovation; the “too big to fail” risk would be greatly reduced.

Resolution

The Regulator (in future, the Bank of England) would be able to shut down a failing bank whilst avoiding the risk of a run on the banks—because all personal and business accounts could be instantly transferred to survivor banks.

Fraud

The costs of account portability need to be set against the potential significant reduction in bank fraud, a great deal of which is the result of poor legacy systems that are easy to override and which would be replaced. A bit like the Victorian sewers, the legacy systems of banks need replacing at some point in the near future, and the introduction of full account portability could be the catalyst that drives this change.

SMEs Differentiation

Banks would be much better able to differentiate between SME customers; currently legacy systems and blunt credit scoring leads to impersonal and inaccurate assessments of the real risks of SME loans.

An Idea Whose Time has Come

Making it easier for people to switch bank provider is not a new concept. Don Cruikshank, who led a review of the banking sector published in 2000, has long been committed to the idea of full bank account portability. Halifax launched the stand-alone telenet bank Intelligent Finance in 2000, with the express aim of making it easier for consumers to switch bank accounts.1 In March 2001 the Competition Commission identified “reluctance” on the part of small and medium-sized businesses “to switch banks” as a major problem.2 Later that year Bank of Scotland announced its intention to capture business from the Big Four with a new “Easy to Join” service which would assign a staff member to oversee the account switching process and deal with direct debits, standing orders, international transfers and the like.3

However, in 2001 the Office of Fair Trading asserted that introducing portable account numbers would “require major investment and significant changes to the operation of the current clearing systems. As the inconvenience of changing account numbers is only one of many constraints on switching, the costs of such a development are very likely to exceed the benefit”.4 As we will see, this finding is now out of date.

In June 2002 James Crosby, chief executive of HBOS, said that he was concerned by delays to greater account portability and that the move was “vital” for competition.5 More recently the Independent Commission on Banking (ICB)—led by Sir John Vickers—called for a system that would make account switching easier. However, the ICB’s final proposals stopped short of full account portability.

The ICB published its final report in September 2011 following an interim report that came out that April. The Treasury Select Committee (TSC) took evidence around both reports, in which several people said that account switching was important.

After the interim report was published, Mr Horta-Osório, chief executive of Lloyds Banking Group, told the TSC that:

“There has been progress made in terms of customers being able to switch effectively and without risk, but more progress can be made. We are proposing a seven-day automated redirection of direct debits whereby customers in seven days can be sure that their account and their direct debits are automatically redirected to the new account without any risk. All banks have now endorsed that solution and the Payments Council as well. That can be implemented in two years and has much lower costs and a much shorter timeframe than account portability, for example.”6

Lloyds told the TSC that “improving both switching and transparency would further enhance competition in the market,” adding that “a world-leading current account switching service could be introduced within two to three years,” but that:

“full account number portability would take much longer to implement (between five and ten years), cost significantly more and would not offer significant additional customer benefits. Indeed, in practice, full account portability would not involve instantaneous (or same day) switching. Providers would have to put in place appropriate processes to protect customers against erroneous or fraudulent attempts to switch their account.”7

The TSC found that the ICB’s interim report had not given adequate consideration to switching and transparency, having devoted just one page to the topic.8

At a roundtable discussion in the House of Commons on 13 September 2012, representatives from the Bank of England, Lloyds, RBS, Barclays, HSBC, Metro Bank, Virgin Money, the Treasury Select Committee the Payments Council, Vocalink and the British Bankers Association discussed the idea of full account portability.

Royal Bank of Scotland Chief Executive Stephen Hester sent the following message to participants in that discussion:

“RBS supports competition in banking markets. We support moves to
improve, speed up and simplify current account switching for retail
customers. There are important technical challenges but these should be treated as issues to constructively work through not insoluble blockers to the end goal. The principle should be that if a customer wants to leave or join us, unreasonable obstacles should not be put in their way.”

Following that event, Which? Executive Director Richard Lloyd said:

“One of the most important ways that consumers can influence the broken banking culture in this country is by voting with their feet and switching to another bank. Yet half of consumers have never changed current accounts.

With consumer trust in banking at an all time low, we want to see banks up their game and put customers first. We urge the Government to seriously look at introducing portable account numbers to make switching easier for consumers.”

Jayne-Anne Gadhia, CEO of Virgin Money said: “We support moves that make it easier for consumers to switch their current account and recent surveys have highlighted that is what the majority of people want. It would be good for consumer choice, good for competition and would hopefully encourage banks to be more consumer-focused in future.”

Andy Haldane, Executive Director, Financial Stability of the Bank of England said that “introducing account portability would help to compete away the problem of too big to fail rather than having to regulate it away.”

The ICB and Payments Council are somewhat timid

When the ICB published its final report in September 2011, it advocated a system that makes switching easier but which stops short of full account portability. The ICB determined that what was necessary was a redirection service for personal and small business accounts that: caught all credits and debits going to the old account (including automated payments); was “seamless” and “problem-free” for the customer (including guaranteed no losses if mistakes were made); sent reminders to direct debit originators that details were updated; and was free to the customer.9 The ICB believes this new system should be up and running by September 2013.10

A major factor in the ICB’s policy decision cost. The ICB reported that:

“Preliminary discussions with the Payments Council suggest that these costs could be in the order of £650 million to £850 million. These are predominantly one-off costs—the ongoing maintenance costs would be very low, and may be balanced out by savings from reducing manual processes. These estimates include costs to all those potentially affected by the change, including central payments schemes, banks that are members of these schemes, banks that access these schemes through agency arrangements, and service users of payments systems such as direct debit originators and merchants.”11

Members of the TSC have recently asked various witnesses what they made of the ICB’s final recommendation on switching.

Bob Diamond, Chief Executive of Barclays, told me that:

“Andrea, we believe that the easier it is for customers to switch banks the better it is going to be for Barclays, simply stated. What we are trying to evaluate is, what is the cost benefit of getting them there?”12

His colleague Antony Jenkins, chief executive of retail and business banking, stated that:

“No, I don’t think that we agree that the proposed solution is going to be a superior solution for the customer, and I will tell you why. Firstly, if we have a seven-working-day window for transferring the account I think that is analogous to moving your mobile phone number, speaking as someone who has done it recently, but importantly I also think if we go down the route of true account number portability the cost is going to be enormous. The £2 billion number feels low to me. But equally, more importantly, it is going to tie up the industry and all of our technology development resources for several years to deliver that. It is not something that is going to be easy to be done in parallel with the ICB recommendations at all, and I worry that that is going to suck out innovation from the industry and doing things for customers that really matter, like improving how they make payments and bringing new products and services to the market.”13

It should be noted that the system that the ICB and Payments Council recommend is not account portability—customers would not be able to retain their bank account number. Being able to retain the same number evidently makes switching from one mobile phone provider to another more attractive and the same would surely apply to bank accounts.

In January 2012, the Chancellor of the Exchequer came before the TSC and outlined the government’s response to the ICB proposal in an answer to me:

“When it comes to the very specific question you have about account portability, first of all, Vickers looked at this and he came to the conclusion that the cost would outweigh the benefits. That ultimately the cost of changing the banking IT systems of the entire British banking system or all British banks so that you could take your account number and your sort code into any bank outweighed the benefit. He thought it was much more expensive than, for example, taking your mobile phone number with you. For example, sort codes currently are very branch specific, so if you keep your sort code that changes the nature of the sort code. So he came to the view that the switching option he proposed, that within seven days you would have in effect a guarantee provided by the industry that you can switch your current account, the numbers would change but all the direct debits and the like would follow without you having to contact all the individual companies that you have a direct debit with, he thought that was a better value for money option. Now, what we have done is-and as I said in the House of Commons, this is partly due to the work that you have done in drawing my attention to this-we have said that if this does not deliver what we hope, then we will look very seriously at account portability, so that was not in the Vickers report, it is something we put into the consultation document.”14

Why we Need Greater Competition

The ICB concurred that there was an issue that needed to be addressed, stating in its final report:

“Competition between banks is blunted by the actual and perceived difficulties for customers in identifying the right account for their needs and switching to it, and by poor conditions for consumer choice more generally. Without consumers being willing to switch between competitors, banks have weak incentives to provide better offers. The OFT study of PCAs in 2008 found that a significant proportion of consumers believe that it is complex and risky to switch accounts, with the result that switching rates are very low. Few consumers actively monitor the relative competitiveness of their accounts. It also found that many consumers are not familiar with the key fees associated with their PCA, and that they have difficulty understanding and calculating these fees.”15

The ICB reported that there was a switching rate of just 3.8% for personal current accounts in 201016, that three-quarters of consumers have never considered switching their current account,17 that 51% of small to medium-sized businesses had never switched their main banking relationship18 and that 85% of businesses surveyed by the Federation of Small Businesses had not switched their main banking provider in three years.19

These switching rates compare unfavourably with other industries. 15% of consumers changes their gas supplier in 2010 and 17% switched electricity supplier in the same year.20 Moreover, 26% of consumers switched telephone provider 22% changed insurance provider in 2010.21

It has been countered that this does not take account of customers who stick with the same bank but upgrade their account. Yet such transfers do little to encourage competition between providers and, as the ICB identified, “low switching rates … are an important barrier to competition not only for those products but also for others, because they define a customer’s main banking relationship and enable cross-selling of other products”.22

The ICB’s rejects the conclusion that low switching rates for banking are explained by near-universal contentment with services, finding that considerable savings can be had from changing accounts and that much apparent customer satisfaction can be explained as “passive”—focusing on an absence of negatives rather than positive enthusiasm.23 The ICB also found that only 40% of extremely dissatisfied customers were likely to switch.24

The market is not adequately producing competition. The ICB found that various banking markets “are considerably more concentrated than any point over the previous decade, and the number of challengers has fallen sharply”.25

Equally pertinently, the ICB concluded:

“There is significant evidence to show that consumers are put off by the current switching process. To switch current accounts, it is necessary for all direct debit originators to update their records with the customer’s new account details, and for the customer to notify their employer and anyone else who makes payments into their account of their new account details. On average, this process takes around days, and requires action by the customer, both the new and the old banks, direct debit originators, and employers and other people or organisations that make payments to the customer.”26

The ICB itself provides evidence that a redirection service may not be comprehensive enough:

“In the Netherlands, where a similar bank account redirection system (albeit with some significant differences) has been in place since 2004, switching rates are still very low, and there remains a perception among non-switchers that the process would be difficult, despite the fact that those who have switched using the redirection service found it easy. It appears that despite the positive customer satisfaction among those that did switch using the switching service, the existence of the service has not (yet) changed the perception among non-switchers that switching would be difficult, nor has it been transformational in raising switching rates. This is not a reason to conclude that the introduction of a similar service in the UK would not deliver benefits. However, it emphasises the need for such a service to be accompanied by improved transparency, and gives cause to be sceptical about claims that the impact of this measure on its own will be transformational for competition and consumer choice.”27

The ICB also said that:

“there may be a case for account number portability in due course, but the redirection service would be a cost-effective first step. If it does not achieve its aims, there could be a strong case, depending on cost, for full account number portability to be introduced (potentially through use of an alias database). Once the redirection service has been implemented, the FCA should assess whether it is delivering enough of an increase in willingness to switch to lead to effective competitive tension. If it is not, then the incremental costs and benefits of account number portability should be considered.”28

The government agrees with the ICB and the Payments Council is now formulating a plan for how to implement the proposal. It is my contention that it would be far better to take the plunge now and go for full portability.

The Advantages of Full Portability

One representative of a newer bank emphasised that banks have to update their IT and legacy systems all the time anyway and that the overhaul needed to implement full account portability needs to be seen in this context. They see this as a ten-year project but an eminently achievable one nonetheless.29

Intellect, which represents the UK technology industry, echoes these views in it’s recent report “Biting the Bullet—why now is the time to rebuild the foundations of the financial system”.

A truly competitive environment requires “free entry” and “free exit” of market players. This is not the situation with banking in this country. Rather the trend has been towards consolidation and mergers. A small number of very large banks dominate. In 2000 there were 41 major British banking groups and subsidiaries, in 2010 there were just 22.30 Four banks have an almost 80% market share of the personal current account and small and medium enterprise lending market. Therefore there is evidently a need for genuinely comprehensive action.

The government should demand that full account portability is achieved in the next ten years. Banks would need to establish a clearing system in common, which would hold all bank accounts with an identifying code to establish which commercial bank has the account.

Several benefits would accrue from this policy. The ability to retain their account number would make it easier and more attractive to encourage customers to change provider. The possibility of almost instantaneous switching would result in much greater competition between banks. Any newly authorised bank would be able to buy a licence to use the system, which would be a boost to challenger banks and take away the unfair advantage enjoyed by long-established clearers.

Accounts could be easily transferred from failed institutions to sound ones, which set in the context of a future financial collapse or potential run on a bank is obviously an additional massive plus for full account portability as it would obviate the potential need for a bailout. Introducing account portability would compete away the problem of too big to fail rather than having to regulate it away.” Contrastingly, the consumer organisation Which? believes that the Financial Services Compensation Scheme, which is the current compensation scheme of last resort, is not adequately understood among the public and that its existence would not prevent another run on a bank.31

This enabling of mass migration also means that the government’s wish to separate retail and investment banking could be effected through full account portability.

Making it easier for consumers to switch providers would be a boost to new entrants in the market and therefore to competition, as the knowledge that they could always switch back would make consumers less nervous about going with a less established company.

The principal objection to full account portability is that of cost, with technological feasibility another concern. Intellect, has undertaken research which allays these concerns and demonstrates that they start from false premises:

“Under the PC’s [Payment Council’s] current proposal, which will not centralise payments information and attach this to a unique consumer identifier, mass migration of millions of accounts would not be possible in the required time frame. Therefore a new, separate system would need to be built to facilitate this requirement—resulting in significant duplication of effort and costs for banks. In the case of state-owned banks, this is public money that is being wasted and, as banks have stated in the past, the increased cost of compliance could be passed on the consumer and could also lead to a reduction in the availability of finance for SMEs … On average, major changes to banks’ legacy systems take between two and three years to implement—this would be a minimum extension to the time it takes to reform the financial system if a separate account migration system has to be built as well. Ultimately, there needs to be a more joined up and forward thinking approach to the reform of the financial system by Government.”32

Intellect also assert that “banks’ own legacy systems are currently stifling innovation; pose a significant barrier to the timely and cost-effective implementation of regulatory reform; and are in significant need of renewal anyway”.33 This view supported by conversations between the author and banking industry insiders.

Why Costs are Overestimated

Estimates of expenditure always have to be set against the possibility of savings. Full account portability could profoundly reduce fraud:

“Intellect members estimate that there could be a reduction of up to 40% on current fraud levels through a central account portability system. When taken in the context of recently released statistics on total fraud losses on UK cards of £169.8 million (between January and June 2011), this would to equate to a saving of approximately £68 million over six months. This level of saving would, over time, help to cushion the cost of establishing an account portability system. The current proposal for account switching would not provide a central view of all accounts and therefore would offer limited benefits for fraud reduction.”34

Intellect further believes that costs have been considerably overestimated:

“Intellect believes that the costs estimated by banks of facilitating full account portability are extremely high, and a detailed evaluation of how an account portability system would be rolled out, both at the core at individual bank level, would prove this to be the case. … The maintenance of the system itself could be paid for on a subscription basis—weighted based on market share. An alternative could be a fee paid to the governing body every time an account is switched. This would need to be set at an appropriate level to ensure that it remains a commercial imperative for banks to retain existing and attract new customers. As set out above, cost savings on fraud would assist offsetting the cost, as would the reduction in costs for personnel involved in account switching at individual bank level, and a reduction in compliance activity (and therefore costs) around account switching activities.”35

The Experience from Abroad

In August last year the Australian government announced that it was dropping a plan for full account portability. Former Reserve Bank Governor Bernie Fraser wrote a report which the Australian government accepted in full. Fraser concluded that “Full account portability is a deceptively simple concept” and that it “would be akin to taking a gold sledge hammer to crack what is really quite a small nut in the broader scheme of competition and account switching in banking services in Australia.”36

Fraser suggested that the Australian government adopt an electronic redirection system, in which a customer’s new institution can request details of direct debits and credits and the customer’s existing institution will provide that information “quickly and efficiently”.37 This is similar to what the UK government is currently planning to pursue.

It is however very noteworthy that the Fraser report also found:

“Although not widely known, a formal switching scheme was established in Australia in late 2008. Its stated aim was to make it easier for customers to switch their transaction accounts among financial institutions, and provide a boost to competition in the process … considerable switching of accounts has occurred since 2008 but the schemes’ contribution has been miniscule — less than 6,000 switches have been executed through the scheme since its inception.”38

This rather begs the question why something that stops short of full account portability is going to have a meaningful effect.

India and Sweden have come to a different conclusion to Australia. In light of mobile phone number and health insurance portability being successfully established, the Indian government has announced that it will bring in savings account portability, although the details are not yet known to the public.39

Sweden has introduced a separate and unique number, called a “bankgiro number”, which allows customers to make and receive the equivalent of direct debits and credits to that number. Third parties need to know this customer number. Essentially, the unique customer number is linked to a customer’s bank account and if they want to switch company they can decouple this unique number and attach it to a new account number provided by the new institution.40

How it Could Work

The fact that, for example, Barclays allows customers to bank on their mobile phones shows that huge progress has been made technologically.41

Intellect outlines in detail how full account portability could work:

“Account portability can be delivered through a Central Utility developed in two phases, that will consist of a central mandate facility, unique identifiers to differentiate individual consumers across the banking system and will be scalable to accommodate the mass migration of up to 30 million accounts in a short time frame. Each phase of the Central Utility will be built with the next in mind, so that the ability to expand it to fulfil these dual objectives, is not limited by design.

The principle enabler facilitating the account portability is the centralised storage of payment mandate information (direct debit, standing order and recurring card transactions) and unique consumer identifiers that will be held in the Central Utility. Both account switching and mass account migration become a case of simply changing the specific target current account data (ie where the consumer holds their current account) rather than a process of re-establishing all of the mandates associated with a consumer’s account. Similarly, receivables directed to the consumer’s account (such as their salary, pension or benefit payment) will not require alteration, as they will be referencing the unique consumer identifier, rather than the actual consumer current account, and will therefore continue to function normally when the underlying target current account associated with the consumer’s unique identifier is switched to a new provider.

In effect, all account information relating to a specific individual or business will ‘hang’ from a unique identifier—in essence a portable number that will be retained by that individual/business on an ongoing basis.”42

Conclusion

Now is not the time for timidity and nor is it the time for false economies. Were the government to announce now that it expected full account portability within the next ten years, that would provide certainty in the market, banks could factor it in to their legacy and IT planning and we would be making a start along the road that the ICB and government alike suspect we may have to take eventually anyway.

Full bank account portability would be good for the consumer and good for challenger banks. It would also be good for established banks—they should have nothing to fear from it being easier for customers to switch, as Stephen Hester of RBS has said. The appalling scenes we witnessed recently of a run on a bank would be a thing of the past and a sector which currently lies low in public opinion would be able to thrive, responsibly, as it has not done for some time.

16 September 2012