Two defining requirements for competition are a variety of offerings from sellers and a willingness by buyers to shop around. To those can be added the idea of contestability – are there barriers to sellers which might stop them offering a full variety of products?
In the financial services sector, there is an ongoing debate about competitive offerings but the greater mystery is why customers have historically been reluctant to shop around – even when there is a lot of choice.
" Regardless of how much ‘variety’ there is, historically consumers have exhibited considerable inertia in financial services." - Andrew Cornell
Regardless of how much 'variety' there is, consumers have exhibited considerable inertia in financial services as opposed to, for example, restaurants.
But is that reluctance dissipating? There are conflicting trends but in Australia, at least, customers do seem to be moving with greater alacrity.
According to the Australian Bankers’ Association submission to the current Productivity Commission review into the financial system, more than three million Australians have switched banks over the past three years with two-thirds finding it an easy process.
The research, by Galaxy, also shows almost two thirds have accounts at more than one bank while in 2016, 8 per cent of credit card balances were transfers – evidence of a shift between products.
Elsewhere though even the promise of radical new financial technologies (fintech) and the idea of 'open banking', where customers are given control of their financial data, allowing more competitors to pitch for their business, doesn’t seem to have driven consumer movement - yet.
It’s early in the fintech revolution, and the campaign is changing rapidly, but there have now been several robust surveys which demonstrate consumers remain reluctant to embrace new providers on a large scale.
The actual market shares of disruptors – be they peer-to-peer lenders, specialist payment providers or wealth managers – remain small.
A survey by Accenture in the UK found a profound reluctance by consumers to share their financial information with a third party, the essential step for “open banking”.
The survey of more than 2,000 people found privacy concerns would prevent a majority from changing their banking habits, with more than half (53 per cent) saying they would never change how they bank and take up more open services.
From next year, European Union laws will force banks to offer open access to customer data, with consent, to encourage competition and switching between lenders but that still requires a willingness by consumers to shift.
The Productivity Commission in Australia undertook a public inquiry into the benefits and costs of making public and private datasets more available - as a potential precursor to encouraging greater competition - and has now turned its eye to open banking.
History tells us too that people become more comfortable with new technologies and opportunities as they mature but financial information has always existed in a different category.
Indeed, trust – bolstered by strong regulation – in the banking system remains a telling competitive advantage for incumbent financial institutions in spite of the public opprobrium evident in some markets.
In Australia, the most graphic demonstration of new competition meeting willing buyers was when mortgage originators entered the residential property market in the 90s. Despite the belief from incumbents that their long relationships and branch networks would see off competition, the mortgage market proved to be highly contestable and in the following decade non-bank mortgage originators picked up almost one in four new mortgages.
Whether residual reluctance to shift is due to a lack of competition or a lack of contestability is a crucial debate. In Australia, the Productivity Commission is taking submissions on competition in the Australian financial system as we speak.
To be tested is the core proposition that customers actually don’t have the range of choice they appear to have. The argument is Australian banking is an oligopoly dominated by the big four; that oligopoly gives them market power; and that market power allows them to over-charge.
Perhaps to many that chain may seem self-evident but actually when using the methodologies favoured by competition regulators, the apparent market concentration in Australia doesn’t limit competition.
For a start, concentration waxes and wanes. After the financial crises, when many smaller and specialist institutions failed – including some of the remaining mortgage originators from the 90s – market concentration increased.
But in recent years, as conditions have stabilised, new competitors have entered or re-entered the market.