Making switching easy is not the same as switching

In the Sydney Morning Herald today, an article looking at the issue of bank switching costs. It argues that the government moves last year to make it easier for people to switch banks has been unsuccessful as evidenced by a lack of take-up.

[DDET Read more]

Despite widespread outrage about mortgage rate increases and the introduction of direct charging of ATM fees, a spokeswoman for the NAB told the Herald only two customers a week had used the “listing and switching” service since it was launched in November.

The chief executive of the Australian Bankers Association, David Bell, also told the Herald that uptake of the service had been very low.

The Government said last year it would inject competition into the banking sector by helping customers “vote with their feet”.

The scheme is a very limited one — allowing customers a list of direct debits and some help re-organising those. But when it comes down to it, that still takes time and paperwork. So it isn’t surprising that there is limited use of what doesn’t look like a very valuable service.

Instead, we need to think larger.

A professor at the Melbourne Business School, Joshua Gans, has called for all bank account numbers to be made portable, like mobile phone numbers, to enable people to switch easily. “The problem is this is not a piecemeal policy issue. This requires a lot of major changes to do it. It does require some serious investment and legislation to be passed.”

There are all manner of estimates as to the cost of this but our experience in telecommunications — an industry with much greater challenges than banking — was that the costs were exagerrated by an order of magnitude and implementation occurred in a timely fashion. The problem is that we also need to deal with switching of accounts in debit (e.g., mortgages) in order to make this work. I don’t have time in this post to outline how that could be done but I think there are mechanisms that could be deployed there too.

That said, the measure of success of any system to reduce switching costs is not how many people use it. Indeed, in principle, the existence of the service is all that is required and by facilitating competition — in particular, to retain customers — it will promote the social good. What we, in fact, want is for consumers to have the option of switching easily so that when they complain to banks about terms and conditions banks will adjust those terms and conditions to stop them from leaving.

Instead, the measure of success is an improvement in competition. And that is where the system is currently not effective. With news that the major banks command major market share and now major profit margins post-GFC, surely the pressure on the government to do something meaningful about bank competition should be on the cards. Resting on the laurels of a functional financial system relative to the mess the rest of the world is in, is simply no excuse.

[/DDET]

7 thoughts on “Making switching easy is not the same as switching”

  1. In electricity retail markets, switching is used as a measure of the level of competition (by the AER and in the UK).
    Given your statement
    “Instead, the measure of success is an improvement in competition. ”
    you seem to disagree with this. Are there any other indicators that would be more appropriate?

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  2. Finding variables to measure “success” is always difficult and problematic. At the moment, this is the best measurement we have until someone comes up with better variables.

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  3. I think your idea of bank number portability is a good idea although given the nature of the banking backoffices I’m not sure achievable within a short period of time.  Potential way around this is a unique account identifier (like a MAC code) that is portable and banks then link this unique identifier to their internal numbers.
    Another possible way is to require banks to shift all DDs etc on request (by the internet, telephone or in person) within 1 to 24hrs to a new bank account.  A list of DDs isn’t much of an improvement.  The key is to effectively reduce the user’s involvement to opening a new account and then telling their current bank what the new account number is.

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  4. I have wanted to switch for ages but the identification validation process has proved just too hard to organize when trying to open an e-account

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  5. Bank number portability would require a new numbering scheme. It’s not analogous to phone number portability. Phone numbers are already “globally unique” within the country’s telephone system. But bank account numbers are only unique within a bank. There will be duplicated numbers all over the place, which is why we have BSB numbers as well.
    It would probably (hand-wavy, totally unprofessional guessing here) be simpler to introduce some kind of redirection mechanism, like the post office.

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  6. Joshua,
    Jacques (and others on the thread) are about right. Given the current system it would be very difficult to introduce a system where bank accounts were easy to switch – a lot more difficult than, for example, mobile phone suppliers. The only real way to do it would be either to change every single banking system in the country to introduce portable bank account numbers or to employ a redirection service where anyone wanting to use the service would get a BSB and account with a “virtual” bank that simply acts as a redirect to the real bank.
    The process would have to work something like this:
    1. Get an account with the “virtual” bank and have that account point to your current bank account
    2. Change all of your DD and other information to point to the “virtual” bank.
    3. Open an account at another bank
    4. Change the “virtual” bank’s pointer to point to the new bank
    5. Close your account at the old bank.
    Once you had set this up you would then just need to repeat steps 3 through 5 to transfer your main banking relationship. You would also have to add in any new DDs, like to your main credit card if it stays at the old bank. Presumably you would also need to pay a fee of some sort to the “virtual” bank for the privilage of the ability to change banks as and when you wanted to.
    Hopefully you do not have too many accounts that you would need to do this for.

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