Banking in Britain is not competitive – at least not in the way that you or I would understand.
A market that works effectively is one in which consumers feel they have genuine choice. For most bank retail customers, and owners of small businesses, it is pretty unclear what that choice is.
People are more likely to get divorced than change their bank account, or so the old adage goes. Even though it is now far easier to switch bank accounts – thanks to a new 7-day switching process – few people have taken up the option. Many can’t see any benefit in moving their accounts. The service and products offered by the big banks look pretty similar to us. What possible benefit could we get moving account from one to the other?
That, argue the industry’s detractors, is precisely the problem. Because the UK’s big banks each have a reasonable share of the markets in current accounts, mortgages and business banking (though most have nowhere near the 25 per cent mark), there is really little incentive for them to offer products or services that are radically different from their competitors.
And, as the OFT has argued, the concentration of the banking sector (RBS, Lloyds, Barclays, HSBC and Santander control 85 per cent of the current account market) means that it is easy for individual banks to keep a close eye on what their rivals are doing, and to move quickly to match any offers, reducing the incentives for customers to switch.
But – and this is a big but – there is much less evidence to show that reducing the market share of these banks would actively improve competition. That is why Ed Miliband is wrong to call for yet another review into competition in the banking sector. Over the past three years, there have been at least three investigations that covered this aspect of the industry: the Independent Commission on Banking, the Parliamentary Commission on Banking Standards, and an ongoing review by the Office of Fair Trading. All three agreed that there was a lack of competition in the sector, evidenced by customer inertia in moving between banks for services. We don’t need another review to tell us there is a problem.
What we need is more concerted action to encourage more financial service providers to flourish – and not just those that ape traditional banks. Credit unions have been championed as a valuable service, particularly for the financially excluded. Yet these have been hampered both by regulation and poor management. More could be done to support this sector.
Building societies traditionally offered some of the competition to high street banks, particularly for savings and mortgages. But a period of demutualisations ahead of the financial crisis, and takeovers since, has laid waste to this sector. We should retain this network and ensure its health.
Similarly, a bevy of alternative finance providers are springing up to help small and medium-sized businesses. These peer-to-peer lenders, crowd funders and others are an important source of ‘complementary’ finance, and we need to look at ways to ensure these can compete on a level playing field against banks.
Insisting we create more high street banks – rather than encouraging more competition in products and services – and having more reviews into the sector, risks delaying much-needed change in the industry.
Ed Miliband would do better to focus on ways the government can continue to help reduce barriers to entry for all financial service providers: by looking at regulation, access to utility-style elements such as payments, and mechanisms to support non-bank competitors.
Finally, politicians need to have the courage to deal with the real elephant in the room: free banking. One of the reasons none of us feel much enthusiasm about changing current accounts is because they appear free. Banks pay for the cost of operating your account through other charges, such as overdraft fees. That hugely distorts the market, and makes it incredibly hard for any new entrant to make inroads into the current account business.
Banks need to be far more transparent about how much things cost in providing bank services. Politicians would do well to focus on whether ‘free’ banking is the right model for the competitive market we need to achieve.