March 21, 2012
According to a Eurobarometer survey in 2011 only 5% of account holders had experienced difficulties in switching their accounts during the previous five years – a resounding minority compared with the 88% who said that they did not need to switch their account. A recently published European Commission report now suggests exactly the opposite, with 81% of the test consumers having had problems with switching their bank account. How difficult is it really to switch accounts, and why is this even important?
Customer mobility is an important factor in the competition for bank account customers, as is also the case with every other service. If it is difficult to get out of a contract, then a higher level of dissatisfaction has to be reached before a consumer does indeed switch provider. If this is the case, dissatisfied consumers remain stuck in contracts that do not optimally fulfil their requirements. At the same time, providers have little incentive to try and win over customers from other banks by offering innovations, new services or more attractive pricing. Difficulties with switching or high switching costs thus benefit inefficient and uninnovative providers. The consequence of difficulties with switching is a lower level of economic prosperity than what would be attainable with greater mobility.
If it were truly difficult to switch, then one ought to see this reflected in the statistics by low switching rates combined with relatively high levels of dissatisfaction. The data presented in chart 1 shows the opposite, though:
This data suggests that in Europe the reason for low switching rates is customer satisfaction rather than problems with switching. High switching rates are accordingly not an objective that is to be attained at all costs in efforts to boost competition on bank accounts – especially as the competition in this segment is rated by customers as stiffer than for other services (according to the European Commission’s 2011 Consumer Confidence Barometer).
The above-mentioned statements seem at first glance to be called into question by a recently published report from the European Commission which states that 81% of account holders that wanted to switch accounts were unable to do so. How do these figures tally with the above-mentioned low figures? Firstly, one big difference is that the Eurobarometer survey is based on all account holders, so those customers with switching problems are expressed as a share of all account holders. This share was relatively low at 5%. The Commission’s more recent report, by contrast, is not based on all account holders but on all those account holders who want to switch accounts. If the Eurobarometer data is based on the account holders wanting to switch provider, then on average 42% of account holders in Europe have problems in making such a switch. This is, however, still a long way away from 81%.
The reason for the big difference between the survey data and this report also has to do with the rules and assumptions made in the report. The test consumers were issued with rules geared towards the stylised switching process laid down in the European Banking Industry Committee’s “Common Principles for Bank Account Switching”. For the test some regulations were applied particularly strictly and/or rules were followed that went further than the principles.
Another noteworthy aspect is that there are very large differences between EU member states with regard to the share of account holders wanting to switch who encounter difficulties (see chart 2). It would therefore be appropriate to conduct national studies into the background for these results in order to develop a problem solution. The structuring of accounts and means of payment remains very diverse across Europe, so a “one-size-fits-all solution” for the whole of Europe would presumably not solve the specific problems in every market, but instead would only cause high costs.
A bigger obstacle to greater integration in EU retail banking markets and more competition in this segment are the still high barriers to opening cross-border accounts or to “cross-border switching”. The European Commission plans in autumn to present draft legislation to increase account fee transparency, possibly including a right to obtain a basic bank account and binding switching rules. Instead of adding more detailed regulation to the very diverse national banking markets in the account segment, an opening of national markets could automatically ensure more competition and further harmonisation for example also with regard to transparency (which is already very high in some banking markets). An opening of the cross-border markets for bank accounts would be achieved via harmonised account opening rules including identification check, creditworthiness checks, anti-money laundering regulations and tax rules. As an account is often the basis for other financial services the integration of EU retail banking markets hinges fundamentally on whether an account can be opened easily across national borders. A statutory regulation on account switching would not, however, contribute to this at all.
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