Banking regulations can be costly: Sometimes it pays to be loyal and lazy

THE public are unhappy with banks. And some people are exercising their right to switch their accounts. This is a key part of capitalism and something that should be welcomed. After all, the threat of exit is one of the most important ways to ensure customer satisfaction. But there is a problem when people go beyond exercising their own right to exit and seek legislation that makes exit easier for everyone.

There are two separate issues here. The first is the costs involved in switching from one bank to another. As someone who is both instinctively loyal and lazy, they don’t really bother me. Yes, I might get a better deal elsewhere, but I do not believe it’s worth my time trying to find out. I don’t have any major problem with my bank, and so I’m willing to stay.

Obviously this makes the bank happy, but this benefits me too. The fact that customers do not routinely switch bank accounts give them more certainty and this is of value. Indeed, when businesses are better able to plan their customers will be better off as a result.

Ultimately it’s an error to think that the competitive relationship is between customer and bank. Think about the dating market. It can sometimes feels that you are competing with the person you are on a date with. But this is incorrect. You are competing with potential rivals. Similarly, bank customers don’t compete with banks, they compete with other customers. In this case, those who don’t sign up to a hard to exit account (and want the benefits that come with that) are competing with those who want easy exit accounts. I have no problem with people choosing easy to leave accounts for themselves. But personally I think it’s a myth that my benefits from marriage would increase if divorce became easier.

The second issue is the ignorance that customers have about the best offers within their existing bank. It’s common practice for banks to offer high rates on new products for a limited time that later reset to a lower one. Therefore, if you want the best deals there is a burden on you to look for them.

If there is demand among consumers for banks that do not do this, that do not provide new products and do not need to entice customers to use them – then banks will provide this. But there is a trade-off between risk and return, and a trade-off between innovation and stability.

This is where regulation comes in. By definition, regulation makes banks more homogenous. It also raises the costs of banking. If some people want low risk, low return savings accounts, fine. If others want a bank that creates lots of new products but requires you to pay attention, fine. It’s only barriers to entry that would prevent different banks from catering to these demands.

There is one universal law of economics: there is no such thing a cost-free regulation.

Anthony J. Evans is associate professor of economics at ESCP Europe Business School: www.anthonyjevans.com

Twitter: @anthonyjevans