“If bankers can count, how come they have eight windows and only two tellers?” Anonymous
The Independent Commission on Banking was established in the United Kingdom in June 2010 following the global financial crisis of 2007. Its mandate was to consider structural and non-structural reforms to the UK banking sector to promote financial stability and competition. The Commission, chaired by Sir John Vickers, produced a series of recommendations in September 2011, which recommendations have formed the basis of some legislation introduced by the government thereafter.
One of the key recommendations was aimed at improving the competitive landscape of British banking by making it easier for customers to switch banks. The Commission found that people only changed banks on average once every 26 years. What makes it difficult for you to move your current account facilities at your current banking provider? You probably have on average about five standing orders or direct debits on your account paying school fees installments, car loans, rent, life insurance policies, DSTV subscriptions, your phone bill and many other regular payments in the daily grind of life. The very idea of filling out forms to move all these payments to another banking provider is mind numbing at best and positively horrifying at worst. The nightmare that the forms will not be acted upon on time, payments missed, Credit Reference Bureau notified and all the nasty correspondence that will follow essentially keeps many of us “trapped” by our current banking providers.
Back in the UK, Sir John Vicker’s commission realized that by making switching bank accounts easier, the competitive landscape of banks would change as banks would have to improve their customer service due to the ease of customer attrition. Essentially bank accounts would have the same kind of portability that the mobile phone industry enjoys in number portability. According to an August 2013 online BBC article titled “Bank account switching service to launch in September,” only about 2 million people or 2.5% of the UK’s total banked switched accounts. The UK banking sector is controlled by four banks, which in total have 75% of all current accounts. Lloyds Banking group has a 28% market share, followed by Barclays at 14%, Royal Bank of Scotland at 13% and HSBC at 12%.
The UK government is keen to see a greater diversity in the concentration of current accounts but apparently has not publicly indicated what targets it has set. The BBC article seems to suggest that the government is keen to see people move away from the big banks and into smaller financial institutions to stimulate the competitive landscape.
The switching system is relatively simple according to the BBC article. Account holders contact their new bank who will do all of the switching for them. A website simplerworld.co.uk allows account holders to select a new provider from a list of banks that are participating in the switching system. The new provider arranges for all direct debits and standing orders to be redirected to the new account. Salary payments from employers will also be redirected. The “Switch in a Week” guarantee was launched on September 16th 2013.
Two banks are already offering incentives to new account holders to switch. First Direct offers £125 (Kshs 17,500) to new joiners while Halifax offers £100 (Kshs 14000).
It is noteworthy that First Direct is offering a financial incentive to joiners when it has consistently topped the list of best banks for customer service in the UK. According to a Daily Telegraph article dated 21st August 2013, the consumer website Moneysavingexpert.com asked 8,000 people to help rank banks’ customer service. First Direct scored 93% of respondents scored First Direct’s customer service as “great” while all the big four banks described above rated below 50% on the “great” score. Pundits are in a ‘wait and see’ mode as to whether current account holders will make mass movements to other providers based on the one week switching guarantee.
Over on this side of the pond, our industry would similarly only move to a switching mechanism were it enforced or required by Central Bank and definitely not of their own volition. The fact is that we all initially choose a provider based on some emotional or practical reason to begin with. Either our employer banked there and it was faster to get our salary payment at the end of the month or the bank’s sales and marketing pitch played to our emotions when we were looking for a place to open an account. Or the plain and simple truth: the bank we have our account in is the one that gave us an unsecured loan, overdraft or mortgage and we are joint at the hip till (our) death do we part. Whatever the reason, the vast majority of us are trapped. It is simply too much of an effort to move and our ratings are probably close to the UK numbers of one move per 26 years!
Our numbers are also remarkably similar to the UK in terms of market share. According to the Central Bank of Kenya 2012 Annual Banking Supervision Report, there were a total of 15.8 million banking accounts in Kenya. Four banks held 74% of these accounts namely Equity Bank with 7 million, Co-Operative Bank with 2.3 million, KCB with 1.2 million and Barclays with 1.1 million.
It is therefore interesting that deposit accounts are concentrated with four banks in a market that has 43 banks. Especially noteworthy is that the shift in market share has only occurred in the last ten years. The question to ponder though is whether a switching rule would be a game changer to the Kenyan banking industry’s market share dynamics. Customers themselves and their levels of satisfaction in the chosen high concentration banks can only answer this question. Sadly, we do not have independent, credible and published customer satisfaction data that would reveal this critical information. The Central Bank of Kenya will hopefully take such a crucial initiative some time this century.