Making account switching easy makes sense

In a market like banking, where a few banks dominate, policy makers favour ease in switching basic accounts because it drives both competition and innovation.

When switching is easy, rivals, large and small, try to woo and retain footloose customers.

Unfortunately, historically few customers actually move from bank to bank and that has more to do with customer inertia than customer satisfaction.  They just don't think it's worth the effort.

Customers believe they run the risk that important direct debit and standing order arrangements will not be transferred.  They will simply not bother for only modest improvements in functionality or account fee reductions.

That's why improving the ease of switching - decreasing the effort - makes sense.

The recent UK experience

In recent years UK policy makers have become increasingly frustrated with what they have characterised as a self-serving and complacent banking sector.

Sir John Vickers, chairman of the Independent Commission on Banking, observed that ‘increased willingness to switch would put greater pressure on banks to offer good products and services’.  His views were endorsed by both Andrew Tyrie, chairman of the Parliamentary Commission on Banking Standards and Chancellor George Osborne.

The industry responded. In September last year the UK Payments Council launched a new automated account switching service to which it committed £650-850 million.  This entails a free seamless process for the customer with guarantees that the customer will not suffer loss if mistakes occur.

As a result of UK Payments Council marketing, coupled with that of individual banks covering their Switch Guarantee Trustmark, some 60 per cent of the public are aware of the new service and - critically - are confident that it works. 

In the last quarter of last year some 300,000 UK customers switched accounts.  This was a 17 per cent increase in switching year on year but the increase year on year in December alone was more than 50 per cent.  Some 99.6 per cent of switches have been successfully completed in seven working days.

Click image to zoom Tap image to zoom

[Figure 1 details the UK ‘winners and losers’.] Data Source: TNS Global. Analysis: Third Horizon Consulting Partners.

The dramatic increase in switching in the UK reflects that when customers, fed up with lacklustre service, can shift easily they will.

Both RBS and Lloyds have, for example, suffered high profile IT glitches which have meant customers have been unable to access their accounts.  Disaffected customers have taken flight, to Santander and Nationwide in particular.

So although each of these ‘winners’ has offered financial incentives (e.g. Nationwide’s refer-a-friend £100 incentive) it is easier switching coupled with disaffection with the current provider that has been the main catalyst for increased UK current account switching.

Implications for Australia

From 1 July 2012 it became easier for current account holders in Australia to switch from one financial institution to another

Under the Australian Payments Clearing Association initiative account holders who want to switch do so through their new financial institution rather than through a request to their existing provider.

This is designed to address the hesitancy of those account holders who may not wish to feel embarrassed in dealing with the exit process at their existing institution and to place the onus for switching on the new financial institution that is gaining a customer.

Surprisingly, however, current account switching in Australia as a result of this APCA initiative was only some 15,500 accounts in the following 11 months.

We think there are several explanations for the dramatically different pattern in Australia compared with the UK which the Murray Financial System Inquiry may well explore.

Does this low rate of switching reflect a lack of customer awareness and trust in the scheme? The continued perception of significant customer effort involved in switching? Or indeed a high level of customer satisfaction in their existing current account provider?

There is a further dimension to this situation though which supports continued effort to ease the effort of switching: the threat of switching promotes innovation.

Click image to zoom Tap image to zoom

[Figure 2 Easier switching to encourage innovation]

As Figure 2 illustrates, when switching is difficult, there is little incentive to innovate. Large incumbent banks may be tempted to take their customers for granted. Even those banks keen to grow will have to provide a strong price incentive to win new customers and often they will be rewarded with only secondary relationships with less valuable customers.

In contrast, when switching is easy, both the large incumbents and ambitious rivals will be encouraged to innovate.  Rivals will include banks and non-traditional providers such as retailers and ‘telcos’.  The incumbents will offer a service designed to retain their best customers in the full knowledge that rivals are offering service and price combinations to lure them away.

Is this true in practice?  We need look no further than the competition between Australian credit card providers where the innovation has focused on devising attractive rewards programs (and the likes of retailers and airlines have a role to play).

This article is co-authored by Richard McManus and Schalk Kock, both financial services experts at Third Horizon.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

editor's picks