The trouble with writing rules is that they can quickly be overtaken by technological change. In 1907, The Hague Peace Conference solemnly prohibited the discharge of missiles from balloons; the first flight of a military aeroplane took place a year later. In its attempt to oversee the more mundane battlefield of Britain’s banking market, the country’s antitrust regulator needs to avoid a similar mistake.
The Competition and Markets Authority is the latest in a long line of competition and parliamentary inquiries into banking, beginning with Sir Donald Cruickshank’s report for the Treasury in 2000 and repeated at regular intervals. These reports make sorry reading. The problems they reveal are persistent — poor service, static market shares, opaque pricing — but the cure has been elusive.
They gather dust on the shelves for two reasons. First, government support for reform has faded in the face of lobbying from those with the most to lose. Second, proposed remedies have focused on the symptoms of a failing banking market not the cause.
The symptoms are embedded and largely unchanging market shares, a uniform product offering based on bank accounts that are provided free of charge so long as the holder remains in credit, and widespread customer dissatisfaction. Remedies such as capping market shares, introducing price controls and seeding challenger banks do not tackle the cause of the problem, which is that a formidable barrier to entry prevents a competitive retail banking market from taking root.
Actually, there are two barriers. One is the branch network, 80 per cent of which is controlled by a handful of big banks. Historically, banks depended on branches to attract and retain customers — even now, new banks need branches to compete with established players. But the switch to mobile and online banking has the potential to change that as specialist digital banks such as Atom and payments companies such as PayPal threaten to bypass the branch.
Online banking in the form currently offered by the major banks is mainly a way for customers to pay bills, receive funds and transfer money between accounts. But online lending is growing fast. At the moment, it mostly involves relatively small scale unsecured lending on credit cards and current accounts. But it will not be long before internet-based players start competing on big-ticket items such as mortgages. Customers with good credit will increasingly borrow online, and challenger banks will find the branch network a much less formidable barrier to entry.
But if the competition authorities wish to help digital and other challenger banks, they need to address the second side of the barrier to entry:the big banks’ control of the infrastructure underpinning the industry. Here, promising proposals from the Payment Systems Regulator, which becomes fully oper- ational on Wednesday, are relevant.
The payments system is the means by which money is moved around the banking system, and in the UK is owned and controlled by the banks. Outsiders find its mechanisms expensive and cumbersome. The regulator has vowed to “open up the payments industry, making it easier for a wider range of parties to access payments systems”.
This apparently arcane change has the potential to open up banking. If it could be further allied to a “national banking grid” — analogous to the electricity transmission network, a regulated utility that enables generating companies to sell power to electricity consumers without worrying about how the connection will be made — then the conditions would exist for a more fluid and innovative banking market. This grid could include front-end technology, the payments system and account switching. It could centralise functions such as registers dealing with fraud and money laundering. It would administer standard industry-wide terms and conditions, ending the confusion that currently arises from lengthy and incomprehensible missives from our banks.
The CMA is due to publish its provisional findings and possible remedies for any failure of competition in retail banking in September before issuing its final report in April 2016. There has never been a better time or a more pressing need for a fundamental reform. If the CMA does its job, the next government will have a major opportunity to mend Britain’s broken banking market once and for all. This could be the banking report to end all banking reports. But if the government or the CMA flinches, the UK will continue to worry about bombs from balloons long after the rest of the world has moved on.
