Mythbusting in the Retail Banking Market
by Anna Laycock
Posted: 15 Aug 2016
Last week the Competition and Markets Authority (CMA) released its final report into reforming the retail banking market. The CMA wants to address longstanding market failures: older, larger banks dominate, new or smaller competitors struggle to attract customers, and both individual customers and small businesses get a bad deal. Already, a number of organisations have expressed disappointment with the report, including the New Economics Foundation, who argue that the proposed solutions "plac[e] the onus on consumers to fix broken markets", and the British Chambers of Commerce, who complain that the CMA "fails to address the structural problems in the provision of business finance".
I'm also disappointed by the report's recommendations, and to me they're reflective of a deeper issue. The way we look at the financial system - and the way we look at big business in general - is based on a number of assumptions that don't, ultimately, hold true. Unpicking these helps us to understand why efforts to reform the financial system have so far failed, and what it would take to transform the system.
Assumption 1: Our role is as consumers, not citizens
The CMA's primary mechanism for improving banking is facilitating customer switching, through increased transparency and periodic prompts reminding customers to review whether they are getting the best value from their account.
Given the lack of meaningful action from banks so far, it seems unfair that it's the customers who have to take action for change - not least because we're also the ones who paid for the failings of the financial crisis. But the real mistake here is to assume that our most important role in relation to finance is as consumers, rather than citizens.
Like every business, financial institutions exist because we give them social permission to do so - there is nothing natural or inevitable about the corporate form. This is even more so in the case of institutions that work with finance, since money is at its heart a social technology, based on trust and backed by a social claim on each other.
In return for that social licence, we can and should expect banks to act with social responsibility. They should serve society, not extract value from it - especially not from those who are most financially vulnerable. As citizens, we have a right to a financial system that supports a fair, sustainable society.
It's right that banks should be transparent about their charges and costs, but they should also be transparent about their business models, particularly where 'free' current accounts are subsidised by high overdraft charges paid by low-income customers. We should decide as citizens whether that's something we want to accept.
Assumption 2: We make 'rational' decisions based on maximising financial utility
Even where, in our consumer role, we know that we might be financially better off with a different product, this doesn't mean we're guaranteed (or even likely) to switch. The model of a 'rational' homo economicus, constantly calculating financial value and taking action on the basis of this information, does not appear in reality.
We have a strange relationship with money. We want and fear it, we are embarrassed to talk about it, we are often reluctant to even think about it. While the saying that we're more likely to get divorced than change our bank account is probably a myth, the degree of inertia around financial products points to the complexity of our behaviour around money. When we make decisions about our money, just like other consumer decisions, we're not driven solely by financial risk and reward. We care about relationships, status, the future, fairness, and a host of other factors that meant that financial data alone is usually not enough to prompt us to action.
Assumption 3: Competition will create a better banking system
Market mechanisms are an important tool for creating change. But when a market is as broken as banking, faith in the efficacy of greater competition seems na´ve.
Competition is a tool, not an end in itself. If the desired outcome is a market that works for all sections of society, competition needs to bring diversity, rather than 'me-too' approaches. But the dominance of the big four, concentration of power in the hands of a few and barriers to scale all drive new entrants to replicate, rather than challenge, the conventional banking business model. The same applies to fintech - it risks becoming a slicker way to enforce the status quo instead of bringing alternative models to the market.
Keith - Posted: 29 Sep 2016
The opinions expressed in this article are those of the author, and do not necessarily represent the views of St Paul's Institute or St Paul's Cathedral.