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The hidden monopoly
The payment system that makes it difficult for small providers to offer current accounts
02-12-2013 | In the UK market, having a current account is a key means to attract new customers and establish long term relationships. It is well documented that the main banks have a large majority of market share, and there are regular calls for greater competition in terms of switching providers and new entrants. How will this increase, beyond the recent seven day switcher service?
"...there needs to be consideration of a different model which is maybe fairer and clearer..."
Head of Personal Banking, Huw Davies
For a new entrant or small provider, the barriers to entry for a credible current account offering can be high. There are the upfront costs to get a product to market including technology development, fraud prevention measures, risk management, set up costs with third party providers of for example debit cards, and more. And then the running costs which can include payments to service providers, ATM usage costs, call centre and operations staff, fraud, marketing, and more.
The challenge increases for smaller agency banks who have to ‘plug into’ larger clearing banks for payments, with costs for items such as faster payments and ATM usage, and compounded by not (initially) having the scale to drive down the unit costs.
The income in this model (where banking as a service has long been ‘free if in credit’) comes from relatively few places including interchange fees, customer fees and penalty charges, the use of balances, and cross-selling other products through this ‘relationship gateway’ current account.
This means that for a new entrant wanting to replicate the prevailing model, there needs to be easier and lower cost routes in to the payment system. And for new entrants who want to establish a revenue model that is not based on cross-subsidising free-in-credit customers, or who don’t have a range of other income generating products to sell, there needs to be consideration of a different model which is maybe fairer and clearer, for example charging per month for the standard banking service, or by transaction, as you would see in other markets.
Furthermore, perhaps true innovation in offers is needed to inspire people to move. This could be an ethical offering, leading customer service, or new technology – something that puts the possibility of better banking higher up the shopping list, rather than a current account and bank relationship being an uninspiring hygiene factor with limited choice.
So, what would help the market thrive? A review of the payments system, greater transparency in – and understanding of – current account business models, fresh thinking in propositions from banks to offer something new, and banks that are socially useful and in touch with customers and their place in society – to restore interest and faith in a sector where the public has lost both.
Huw Davies is Head of Personal Banking at Triodos Bank