FOR once, Labour has got it half right. It will confirm today that it wants to make it much easier for current account holders to change bank, in a bid to empower consumers and to drastically improve competition in retail banking. The idea is to make switching bank as easy as it is changing mobile phone company by giving consumers ownership of their bank account numbers, in the same way that they now own their phone numbers. Bank account portability might sound like a technical change – but it would revolutionise the entire financial services industry and allow new entrants such as Tesco to scoop up market share very quickly.
Signing up students when they open their first account, knowing that they are less likely to leave than to get divorced, remains a central strategy for many high street banks. In theory, it is not that hard to change bank and some people do so already (see story below) – but most consumers are put off by the paperwork and worry that money will get lost. Red tape – including anti-money laundering legislation – also makes it harder to switch.
Unfortunately, Ed Miliband’s other views on banking reform are misguided. He wants to carve out yet another 1,000 branches from the existing Big Four – Barclays, HSBC, Lloyds Banking Group and RBS – and hand them over to “challenger banks” to create a Big Seven. Some of this is already happening, with Virgin snapping up Northern Rock, and Co-op set to buy branches from Lloyds. But there are three problems with extending this top-down approach any further.
Centrally planning competition doesn’t work. Why seven banks? Why not nine, or 30? The truth is that the supermarket industry is ultra competitive – even though people often only have the choice of two or three stores. The same holds in other industries. Market structure is not the issue. The key is to empower consumers to vote with their feet – and then allow the structure of the market to adjust to their free choices, in a bottom-up fashion, rather than to try and plan what it should look like.
Another problem with forcing more branch disposals is that large numbers of customers would have to change bank against their wishes, creating chaos and inconvenience. Last but not least, it is complicated and costly to carve out branches from an existing bank. The current amputations are taking years to execute, with vast numbers of consultants involved. It would be better to spend the money – bank account portability would be expensive – on building a new ultra-modern clearing system. It would hold all accounts with an identifying code to establish which bank holds the account, allowing near instantaneous switching.
Intriguingly, this is one issue where Labour and the Free Enterprise Group of Tory MPs are now allies. The group issued a pamphlet advocating full bank account portability last year, penned by Andrea Leadsom. In her version, any newly authorised bank would be able to buy a licence to use the system, removing the advantage of the long established clearers. Accounts could also be easily transferred from failed institutions to sound ones during a crisis, reducing the risk of a run.
This is the kind of policy the City needs to adopt to rebuild itself along pro-market lines. Banks should embrace full account portability, rather than the adulterated, ersatz version proposed by the coalition. Banks desperately need to improve their reputations. Enforced relationships never end well – so treating consumers like grown-ups by giving them an easier exit strategy would undoubtedly be a good first step.
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