16 February 2016 | Business Think
You are more likely to change your wife than your bank, UNSW Business School researcher Rob Nicholls remembers hearing when he was at school. And he finds ample evidence that it remains true today.
We shop around for the best deals in most things, but tend to stick with our bank. Even when there are thousands of dollars to be gained from better interest rates elsewhere, and despite knowing they are having a lend of us with fees, charges and interest rates.
This reluctance to switch is now being framed as a problem for any economy that prizes competition. Australian governments and regulators have favoured stability over innovation in a Four Pillars policy, which prevents our four major banks from merging. It is effectively a government guarantee that entrenches four incumbents.
The stability helped Australia weather the global financial crisis (GFC) but the worry is that this has come at a price for consumers. The risk is that this comfortable foursome may be unprepared for emerging disruptive financial technology, just as taxi monopolies worldwide have been shaken to their core by Uber ride-sharing.
Recently, peer-to-peer lender SocietyOne, whose digital platform matches borrowers and lenders (and is backed by business heavy-weights James Packer, Lachlan Murdoch and Ryan Stokes), started providing car loans to Uber drivers, with repayments being made from the drivers’ Uber income.
Another example is online payment system PayPal – where customers pay a business through PayPal, which provides working capital for the business, and Paypal takes repayments out of the customer payments it handles.
‘This shows how innovative fintech start-ups can win niche business in the digital economy from banks’
– rob nicholls
“This shows how innovative fintech start-ups can win niche business in the digital economy from banks,” says Nicholls, who lectures in the school of taxation and business law at UNSW Business School.
“We need to have such disruptions and innovations, doing things differently, just as there has to be basic levels of consumer protection in banking. Regulation, yes, but without too much.”
In a forthcoming paper,Competition in Australian Retail Banking: How Much is Enough and Options to Facilitate More, Nicholls, UNSW Law School associate professor Deborah Healey, and researcher Charlotte Penel argue that getting consumers to switch banks is one way to lift the level of competition in retail banking in Australia.
Working on the principle that a monopoly has little incentive to innovate, and using modelling including the Schumpeter inverted U-shaped function to work out how many competitors are required to hit the optimal turning point on the innovation curve, they conclude that there has been a drop in Australian banking competitiveness since the GFC.
Similarly, by employing the Herfindahl–Hirschman Index they show that Australia lies between the UK and the US in banking competitiveness, comparable with the euro area.
Because it’s economically rational that there would be lower loan rates and more innovation if customers always switched to the bank with the best deal, regulators have been forcing banks to make it easier for customers to be more mobile.
We happily shop around for electronics and petrol, but the inertia when it comes to banks has been blamed on deep-seated psychological reasons. Such as our tendency to avoid loading our brain with avoidable decision-making. We prefer the quick fix rather than careful consideration of alternatives.
Changing banks is time consuming and the lower interest rate rewards are too far down the track. Perhaps it’s better the devil you know – how can you be sure another bank will be an improvement overall?
Banks exploit these psychological weaknesses. Strategies such as ‘relationship banking’ entangle customers in cards, mortgages and insurance to the point where it’s too complicated to get out.
The UK appears to be leading an international charge to get consumers shopping around to make banks more competitive, rather than the traditional approach of governments regulating against bank rip-offs.
In 2013, the UK guaranteed customers could switch banks within seven days and make up any missed payments when transferring salaries and regular payments. Yet this only boosted switching by 2%.
‘Customers are markedly less satisfied than a decade ago and the lack of switching casts doubt on whether banking is a well-functioning market’
– ROB NICHOLLS, DEBORAH HEALEY & CHARLOTTE PENEL
So last year came Midata, using data analytics – your history of banking – which UK customers can request from the bank and put in an online comparison engine run by the website gocompare.com, to find the best deal.
If you dip into your overdraft, you can be automatically pointed to the account with the cheapest overdraft facility. If you have a high balance, the search engine can recommend the account that pays the most interest, according to Lawrence Freeborn, UK analyst for the global market research company, International Data Corporation.
Yet again, despite generous ‘come on’ offers, Midata has made no discernible change in switching numbers. This could mean customers are satisfied, Freeborn says.
“Or consumers who get as far as looking at their Midata analytics might decide that once the one-off incentive is factored in, there is not much point in switching. The second possibility is that, even while the industry kicks away consumers’ excuses for inertia, they still either don’t trust the service or can’t be bothered,” he adds.
Contraction of competition
In Australia, a 2012 government ‘tick and flick’ scheme to facilitate changing banks was a flop, attracting only hundreds of takers. A streamlined approach, similar to Midata, was suggested last year to the Harper Competition Policy Review, which came in the wake of the contraction of competition among Australian banks since the GFC.
With Westpac acquiring St George and RAMS home loans, and the Commonwealth Bank acquiring BankWest and 80% of Aussie Home Loans, the big four banks now hold around 84% of loans in Australia. They also bought out many of the big independent financial advice firms.
The consumer peak body CHOICE argued to the Harper review for a scheme such as Midata. The idea being that the rich computer data trail left by consumers, which Google, banks and other businesses use to tailor their product offerings, is handed over to allow a neutral robot to find the best banking deals available.
Nicholls and his co-authors consider various models for such a comparison site in Australia. This could involve, say, the Commonwealth Bank managing a centralised payments system, which could be checked by the other financial institutions, as Telstra does with mobile phone number portability.
According to Australian Bankers’ Association chief executive Steven Münchenberg, Australia’s banks are competitive with plenty of choice for consumers and very high satisfaction levels.
“There is no shortage of ways people can research the best deals, including bank websites and comparison websites,” he says.
Yet the researchers say customers are markedly less satisfied than a decade ago and the lack of switching casts doubt on whether banking is a well-functioning market.
The risk is that banks’ declining competition may no longer support broader economic outcomes such as innovation and consumer welfare. Consumer inertia suggests not enough is being done to facilitate choice in retail banking.
The authors favour promoting consumer choice through bank account number portability and consumer access to their banking data to encourage bank competition.
Also, they want cover for “regulatory blind spots” that leave potentially disruptive emerging lending channels unregulated. Their worry is that banking, an enabler of productive economic activity, is concentrated in the hands of a few players with similar business models and may be susceptible to rapid transmission of risks that arise.