The Independent Commission on Banking (ICB) published its final report last week. While much of the reporting focused on ring-fencing and capital ratios, one important part went under-reported: competition.
Politicians and regulators have long seen competition as good for consumers. It is said to drive up standards and drive prices down. However, the retail banking is a very concentrated sector – the ICB report funds that the “largest four banks account for 77% of personal current accounts and 85% of SME current accounts”.
So how can we increase competition?
One answer, according to the ICB, is to make it easier for people to change who they bank with, commonly referred to as switching.
This concept is popular among regulators in a number of sectors, Ofgem, for example, looks at switching rates as one indicator of competitiveness among energy suppliers. It doesn’t require the state to intervene and break up firms, it is easy to measure and it is easy to apply to industries which have large barriers to entry.
However, despite the growth of price comparison websites and national advertising campaigns by energy companies only around half of consumers have switched their energy supplier – and this is during a time of squeezed incomes and double-digit energy price rises.
The Energy Secretary, Chris Huhne, recently told The Times (£) that consumers don’t put enough effort into getting the best deal.
“They do not bother. They frankly spend less time shopping around for a bill that’s on average more than £1,000 a year than they would shop around for a £25 toaster.”
If consumers aren’t changing energy suppliers, there’s little evidence to suggest that they’ll switch between banks. So will encouraging switching really switch on competition?