Banking services: cost-effective switching arrangements
3.1. Although not widely known, a formal switching scheme was established in Australia in late 2008. Its stated aim was to make it easier for customers to switch their transaction accounts among financial institutions, and provide a boost to competition in the process.
3.2. The scheme covers the transaction accounts of banks, building societies and credit unions. As noted earlier, these accounts hold readily accessible funds and can be used to make payments of various kinds, as well as to make direct debits and receive direct credits. The scheme does not extend to term-deposits, and nor does it bear directly on the switching of mortgages. (To the extent customers find it convenient to keep all their banking products with one provider, easier switching of transaction accounts might indirectly assist some customers to switch mortgage accounts also.)
3.3. Other features of the current scheme are that it applies only to retail customers and not to small business customers. Its monitoring and governance arrangements are also somewhat vague and it has not received much promotional effort.
3.4. As discussed in Chapter 2, considerable switching of accounts has occurred since 2008 but the schemes' contribution has been miniscule — less than 6000 switches have been executed through the scheme since its inception.
Diagram 1: Current account switching arrangements1
3.5. The steps involved in accessing the service are shown in Diagram 1 and verbalized below:
- a customer intending to switch institutions informs the existing institution of this intent, and requests a list of all direct debits and credits pertaining to the account in question;
- the existing institution is obliged to provide that list to the customer within five working days;
- the customer takes this list to the new institution and requests that institution to effect the transfer of any direct debits and credits to the new account;
- the new institution provides the customer (in person, or by electronic means or mail) with an authorisation form or letter for each direct debit or credit that the customer wants moved across to the new account — the customer is responsible for signing each of these letters and returning them to the new institution for the switch to proceed;
- in the course of effecting the transfers by the new institution, the various institutions of the third parties associated with the direct debits (for example, billers and merchants) and direct credits (for example, employers) are made aware of the customer's switched transaction account. (These third party financial institutions are involved in this process because of their direct relationships with the third parties. APCA retains a record of all these third parties and their relevant financial institutions, which all financial institutions can access.);
- those institutions then notify the third parties (their customers) of the switch in accounts; and
- the third parties update their customer details to ensure that they debit or credit the customer's new account.
3.6. As noted earlier, this scheme has been poorly patronised. In part, the low take up possibly reflects limited awareness of the scheme among both potential users and counter staff within financial institutions. Perceptions of the hassles involved and doubts about the financial benefits of switching transaction accounts — especially compared with mortgages and high-interest savings accounts — might also be part of the explanation, although the large numbers of customers switching transaction accounts outside the scheme tend to discount that thought. Those large numbers suggest that, whatever the reasons for by-passing the scheme, customers overwhelmingly are able to organise their own switching — they may even prefer to do so because they see greater certainty and control in that approach.
3.7. It is clear that the existing scheme contains some serious flaws. In particular, it requires customers contemplating a switch to front their current provider to convey this intention and to request a list of the direct debits and credits attached to the account. This is likely to be a confronting experience for some customers, especially those seeking to escape a ruptured banking relationship. Moreover, while obliged to co-operate, the existing institution has no real incentive to pull out all stops to assist the departing customer to move to a competing institution. Again, the customer may well be required to undergo another identification check at the new institution, with more (at least perceived) hassle.
3.8. As noted in Chapter 2, no country has implemented full account number portability, predominately because of the substantial costs involved. Several countries, however, have established formal arrangements to assist customers to switch from one provider to another, including the United Kingdom, the Netherlands and some other European countries and, more recently, New Zealand. Data on the usage of these schemes are largely limited. The oft-recycled data from the European Commission in 2009 suggested a switching rate across the European Union of around 9 per cent over two preceding years. The UK Office of Fair Trading noted in its report Review of barriers to entry, expansion and exit in the retail banking sector issued in 2010 that the switching rate for transaction accounts was estimated at 9 per cent in 2009, up from around 6 per cent in 2006.
3.9. The overseas schemes operate within a variety of different payment system infrastructures and regulatory regimes. Such differences in contexts, together with broader differences in history and culture, call for a degree of caution when considering the transferability of arrangements developed in one country to another country. That said, a review of switching schemes in the countries mentioned has been helpful in firming up likely remedies to the flaws in Australia's current switching arrangements, particularly around the tasks assigned to the customer and the old (losing) institution. The customer is required to sign several forms and to rely heavily upon the old (losing) institution to perform much of the work necessary to effect the switch to the new (acquiring) institution.
3.10. In the proposed arrangements customers would sign one form signifying the switch to their chosen new financial institution and authorising that institution to execute the related processing work on their behalf. This is in line with the main thrust of the overseas schemes where the new institution assumes much of the responsibility for effecting the switch (rather than the consumer), and where there is limited inter-action between the customer and the old institution. In the countries observed, industry bodies (rather than governments) tend to be the major players in developing and running switching schemes, and in formulating principles and standards to govern account switching. This makes considerable sense, subject to agreement on appropriate operating principles and monitoring.
3.11. The proposal which is outlined in Diagram 2 and the related commentary draws in part on observations on overseas schemes, as well as the experience with the existing Australian scheme. What is proposed could be implemented within Australia's existing bilateral payments system infrastructure, and, potentially at least, encourage more customers to switch (and switch more frequently) in pursuit of better deals. At the margin, this could reinforce underlying competitive pressures in the market for banking services.
Diagram 2: Enhanced switching arrangements2
3.12. The steps involved in the revamped scheme are sketched in Diagram 2. In short:
- the customer requests the chosen new institution to switch the relevant transaction account from an existing institution, and signs a single form authorizing the new institution to facilitate the switch on their behalf (including the transfer of associated direct debits and credits);
- the acquiring institution sends a request to switch to the customer's current provider through the proposed APCA mailbox (see below) and requests details of relevant direct debits and credits;
- the current institution provides these details to the acquiring institution, again through the APCA mailbox, within an agreed time frame;
- as under existing arrangements, the acquiring institution informs the institutions of the third parties (that is, the initiators of the direct debits and credits) and the customer that the switch has occurred;
- the institutions of the third parties inform those third parties of the switch; and
- the third parties adjust their account details accordingly.
3.13. Diagram 2, and particularly steps (i) and (ii), should be viewed in the light of the letter dated 9 June 2011 from the CEO of APCA; a copy of this helpful letter is attached (Attachment 1). APCA manages a number of payments clearing systems and has been discussing with its members (which include banks, building societies and credit unions) possible enhancements to its systems to empower the customer's new provider to better manage switching.
3.14. The APCA proposal envisages the development of a switching 'mailbox', a convenient and secure electronic means through which a customer's new institution could request details of direct debits and credits and the customer's existing institution could similarly provide that material quickly and efficiently. In other words, the mailbox would allow financial institutions to both make and respond to requests for relevant details of direct debit and credit arrangements of customers switching their transaction accounts. APCA estimates that its work on the project would take about six months to complete and cost it about $250,000; some additional spending — unquantifiable at this time but likely to be modest — would be required by participating financial institutions on changes to their back-office and processing arrangements.
Implications for stakeholders
3.15. The interest in account portability/switching seems to be largely about widening the choices available to consumers of banking products by making it easier for them to move their accounts to take advantage of the best available deals. Many details remain to be settled but arrangements broadly along the lines proposed have the potential to assist customers in this endeavour — and to do so without burdening the industry (and ultimately all customers) with unwarranted costs.
3.16. A single form (paper and/or electronic) signed by the customer and authorising the new banking provider to effect the transfer of all direct debits and credits to the new transaction account should enhance the attractiveness of formal switching arrangements, especially for those customers who are reluctant (for whatever reason) to take on the task themselves. Perceived problems with identity verification checks, however, seem to be greater than actual problems. Concerns about the proof of identity test do not appear to be a source of particular complaint for Australians, and the relatively large number of switches which are occurring seems to confirm this. Recent changes to the Anti-Money Laundering and Counter-Terrorism Financing Act are expected to assist banks (and other financial institutions) to verify a customer's identity over the internet. This will enable customers and financial institutions to undertake more of their interactions online, and assist particularly smaller institutions (and those without extensive branch networks) to compete more actively.
3.17. The current scheme applies only to retail customers: it does not extend to small business customers. The transactions of some small business customers are likely to be more complex than those of retail customers (different business structures and much larger volumes of transactions and direct debits, for example) but in many instances the issues would be broadly the same. Small business generally would welcome more competitive deals, and with some banks showing heightened interest in that area of lending, now would seem to be a good time to start removing impediments to switching. Consideration, therefore, should be given to broadening the proposed scheme to small businesses, commencing with those most akin to retail customers and moving over time to include others as systems and opportunities permit.
3.18. For the banking services industry the cost implications of any new proposals are always of great interest, to large and small players alike. The proposal outlined here should not raise serious concerns on that score. It could be implemented with minimal changes to the existing payments system infrastructure and therefore with minimal costs. As mentioned earlier, the estimated cost to APCA of the proposed mailbox enhancement would be quite modest, as would the likely costs of related enhancements of back-office processes for banks, building societies and credit unions. Some additional spending on establishing a dedicated capability to deal with all customer inquiries related to switches could be a good investment in building new customer relationships.
3.19. The proposed arrangements do put more responsibility for effecting switches onto the new institution (and less onto the old institution and the customer), compared with the current scheme. For the reasons mentioned earlier, this represents a better alignment of incentives between new and old institutions. Transaction accounts are valuable banking products, bringing with them low interest balances which make up a significant part of the overall funding needs of many institutions. Traditionally they are also 'anchor' accounts to which other accounts can be tied. It is appropriate, therefore, that the acquiring institution should shoulder most of the task of effecting individual switches — all the incentive is with that institution (and none with the losing institution) to nurture the potentially profitable new banking relationship which starts with a successful switch.
3.20. In macro terms a lot of churning of accounts is inherent in the market place, with each institution acquiring and losing accounts on an on-going basis. Every institution cannot be a net acquirer all the time but those that gain a competitive edge can reasonably net acquisitions while their competitive edge remains. Institutions which believe they have a competitive edge at any time — be it in price, technology, service, or affinities with particular communities/workplaces — will be keen to capitalise on that advantage as much as possible. In the same way that they have the potential to help spread the benefits of competition among consumers, cost-effective switching arrangements also have the potential to help direct the rewards for successful initiatives to the institutions concerned.
1 In the diagram 'bank' also refers to credit unions and building societies.
2 In the diagram 'bank' also refers to credit unions and building societies.