On the need for bank account number portability
Like in many other industries retail banks as well are coping with the impact of digital and changing customers. However: the impact on competition and churn rates seems to be limited compared to other industries. These low churn rates also come with high switching costs and therefore limit competition in the market. Next to limited switching between existing players the high switching costs also prevent new entrants on the market from gaining customers for their operations.
Both in the UK as in the Netherlands the CMA (competition and markets authority) is the government body responsible for monitoring and fostering competition in the domestic banking market. In order to do so they hired research specialists Moorhouse (UK, 2015) and Decisio (The Netherlands, 2016) to examine the impact the introduction of BANP could have on the competition in the retail banking market. These studies also serve another purpose: they are to feed the preliminary talks before the pan-European evaluation of bank account number portability in 2019.
Bank Account Number Portability: What is it?
The BANP is broadly defined as "the possibility of moving from a current account provider to another one without losing one's account details" (Decisio, 2016) and without having to inform any third party other than the concerned banks of the account switch. The aim is to transform the process of changing account providers into a seamless experience for customers.
The same concept (Mobile Number Portability, MNP) was implemented in the telecom industry in the European Union several years ago, as well as in many other countries around the world. Similarly to the banking industry, when changing operators, consumers had to give up their existing phone number, making them reluctant to change their operators, which in turn inhibited the competition. The goal of the MNP was clear: the regulators wanted to enable consumers to change their operators more easily by reducing switching costs, defined as money and effort, and thus to increase competition and reduce entry barriers in the telecom industry.
The introduction of the BANP would benefit consumers in the same way as the MNP; it would decrease customer switching costs and foster healthier competition.
Retail banking offers are commoditizing quickly and hence the small differences between different bank offers too often do not trigger customers to consider the switch. BANP however could trigger customer to switch for smaller differences as the perceived cost of switching banks would be lower. This increased customer flexibility would urge banks to work on customer retention by offering top-quality service and support to its customers. The UK Financial Conduct Authority claims that 35% of private customers and 40% of businesses would more easily consider switching account if BANP would be implemented.
Could BANP lower the barriers of entry for direct banks? Even though fully digital banks without physical branch-network banking are already widely present in Europe and 2 out of 3 customers would consider a direct bank as a second or third bank; we see that they are mainly present in the more niche-type of accounts: savings, investments, insurance (Bolero, Binckbank, Fortuneo, NN Bank…). Better customer mobility could however trigger those banks to change the scope of their offering and include current account and other normal retail products in their offering.
What about direct banks that are already offering retail products? This concerns both start-ups such as N26, Fidor bank and Monzo as established direct players such as Hello!, Soon, ING Direct and B for Banque. This type of direct players would certainly support the introduction of BANP in order to fully leverage their easy account making procedures and serve their customer friendly to a broader piece of the market.
Challenges for banks
It is clear however that BANP would mean lots of extra efforts to be done by banks. It is clear that a certain kind of collaborative effort of those banks that offer BANP is needed: a system should be developed that allows for the smooth transition from one participating bank to another one. How will the system overcome the current IBAN structure? The exact format of this system greatly depends on the final solution. It could be a central database, a system of proxy-account numbers or the account numbers and their owners could even be tracked on a distributed ledger and stored in a blockchain (more on possible solutions can be found in the CMA study). Hence: lots of possibilities but the development of the system will come at a certain price. Next to the costs of jointly developing the system it is clear that the implementation of the system could possibly greatly impact banks’ own middle and back offices and hence come with great costs of re-structuring internal processes and infrastructure.
In summary: we can easily identify some reasons why banks might be reluctant to start implementing BANP. There is the cost of development and the cost of implementation and all of this to increase competitive pressure on their own business. These challenges show that BANP implementation will be more likely to be the result of strong society pressure (the voice of the customer) or a decision of a regulatory body than it will be the initiative of the banks themselves.
3 conditions for successful BANP implementation
The case of the telecom industry
BANP would pursue the same goals as MNP. After its introduction, however, the MNP did not generate the expected benefits in all the regions where it was implemented. In order to understand why, it is interesting to briefly explore the case of the introduction of the MNP in China and in Finland.
The case of its introduction in China brings insights about potential roadblocks. Indeed, after two years of trials, the number of MNP application accounted for a rough 1% of the population while only 1% of these applications were successful. Many regulatory barriers remained and impeded the full portability of mobile numbers. Moreover, dominant players were still producing high switching costs for customers by bundling their products.
Conversely, in Finland, the numbers of ports far exceeded the expectations. Roughly one year after its implementation, Finland had registered a cumulated number of switches that accounted for 25% of the total number of subscriptions. The first reason behind this success is that the regulatory climate of Finland was friendly to the MNP due to the few roadblocks it posed (for example, the ban of handset subsidies and long subscription contracts). A second and important reason was the implementation of a user friendly and free of charge porting process.
Lessons learned: the 3 conditions:
Technically speaking, the implementation of the BANP could deliver the expected benefits. As illustrated by the MNP implementations in Finland and in China, it seems to be a different story in practice. We have therefore, without going into the technical details, identified 3 important conditions that have to be met in order to successfully reap the benefits from the BANP.
Firstly, if implemented, full portability must be attained and regulations must be adapted. China, an incomplete portability as well as inadequate regulations are very likely to result in few porting applications and/or very low success of porting.
Secondly, it would be preferable that no other significant switching costs exist in order for the BANP to be fully effective. In Finland for example, the key success factor of the MNP was the implementation of a user friendly and free of charge porting process. In a benchmark realized by Sia Partners, we identified that in Belgium, for example, the bank account creation process remains very bureaucratic and is not fully digital, while in France, the process is more digitalized and appears more user friendly. The complexity of creating a bank account heavily impacts the switching costs and the benefits of BANP.
Finally, for full portability to be available to customers, it is important for all the main side services proposed by a bank to be transferable. The simple example of physical assets such as debit cards and cheques or digital assets such as payment data history illustrate this third condition.
Going beyond BANP
Several steps have already been taken throughout Europe in order to foster healthier competition on the banking market with European initiatives such as the "Payment Service Directive" (PSD2) and the "Payment Account Directive" (PAD).
The PAD aims to increase transparency about the fees and costs related to payment accounts with the objective of allowing for easier comparison between different banks. Next to enhanced transparency PAD also demands easier ways to switch between different banks. In order to obtain this last objective PAD states that every European country should have a “current account switching service” (CASS). Such a service already exists in for example the UK and the Netherlands but is not yet a pan-European reality. Despite its existence, switching rates are still low. Main obstruction is the need to change the bank account number, which is required in the current CASS.
PSD2 on the other hand, when fully implemented, could allow for third party providers (TPP’s) to offer services to banking customers. Examples of these services are payment services and personal finance management solutions: it is clear that these services could greatly impact the bank-customer relationship and possibly even make the underlying bank-account number less relevant and hence put in question the need for BANP. However: PSD2 won’t be live before 2018 and its’ impact cannot be accurately estimated as long as the EBA has not finished the regulatory technical standards for this directive. Hence: the PSD2 evolution is definitely to be taken into account when judging the need for BANP but its impact is unknown.
A more real-life step towards BANP can be found in Sweden: the Swedish Bankgiro is worth mentioning. Indeed, it resembles what Moorhouse called a "New Identifier Model". In this model, new account numbers are issued when a consumer changes its provider, but these account numbers point to a single identifier that serves as a proxy. The customer only has to mention its Bankgiro number and the beneficiary bank directs the credit to the related accounts. However, the system is so far only proposed to corporate clients and can only be used for crediting accounts that are linked to only one payment system. Even though not yet widely spread the “new identifier model” could be a very elegant approach to BANP, a similar model is suggested by the study as well.
Some further thoughts on the single identifier model: in Belgium and the Netherlands banks are already working on the idea of providing a mobile ID to their customers. This basically means that banks would allow customers secure access to, for example, online government services by using their bank account details. This system leverages the fact that a bank account number always traces back to a legal ID that has initiated the creation of the account number. It is clear that these mobile ID solutions carry all the elements for a single identifier model with proxy account numbers.
Sia Partners expects that Bank Account Number Portability could positively impact the competition in retail banking markets across Europe by urging leading players to optimize their offers and by offering smaller players to more easily attract customers and gain market share. As the retail banking offering is quickly commoditizing Sia Partners expects that the benefits of BANP will be biggest for those actors offering the most user-friendly and qualitative services. The reluctance of banks can be very well understood given the high implementation costs. We think the role of politicians in this case is not only to support BANP by regulation but also think about a decent financial compensation to smoothen such a large change in our economic infrastructure
As explained above we are convinced that an evolution of the “new identifier model” as proposed by Bankgirot in Sweden (and as suggested by the CMA study as well) seems a feasible approach to reach full BANP. This solution would also be valuable in a PSD2 context where financial services could be offered by a wide variety of new players and hence a simple way of secure authentication with a single identifier will be key.
This, however, comes at certain conditions. Sia Partners identified three major conditions for BANP to deliver its full benefits: (i) a complete implementation, (ii) the absence of other significant switching costs and (iii) the full portability of main side services.
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