U.K. Banks Make It Easier For Customers To Shift Accounts To Competitors

by Trefis Team
Royal Bank of Scotland
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Banks in the U.K. recently put in place a process to ensure that customers who want to switch their accounts to other U.K. banks can do so without any hassle. [1] Small and large banks in the country actually incurred costs of roughly £750 million ($1.2 billion) over the last two years to be able to handle the entire process of moving an account to a competitor within seven business days at the customer’s request.

At this point you are most likely wondering what exactly these banks are trying to achieve by making it easier for customers to do away with their services. Well, they had no choice, as this was one of the directives issued by the British government to the country’s banking sector in the aftermath of the global economic downturn of 2008. The move was aimed at ensuring that a dissatisfied customer is not forced to continue with a particular bank only to avoid the tedious process of shifting his or her account to another bank.

The move actually makes sense from a customer’s perspective in the extremely concentrated U.K. banking industry, as it could spur growth among the smaller banks. But what really are the implications of the change for the British banking giants Lloyds (NYSE:LYG), RBS (NYSE:RBS), Barclays (NYSE:BCS) and HSBC (NYSE:HBC)?

See our full analysis for RBSBarclays

Why Come Up With Such A Rule In The First Place?

In 2009, the British government was forced to bailout Lloyds and RBS even as the other two banking giants Barclays and HSBC barely managed to stay afloat. Since then, the government has been keen on finding ways to reduce the impact on the country’s banking sector and the economy at large from a failure of one of these banks – a rather steep task considering the fact that these four banks garner a share of nearly 75% of all deposits in the country.

The idea of leveling the playing field for smaller banks by removing the barrier associated with shifting an account to any bank was passed as a directive by the government in 2011. Regional players could hope to target more customers by offering more customized products and services, and customers would be less reluctant to make a switch if services they have setup over time (like automatic bill payments and fund transfer settings) were transferred seamlessly to their new bank account. Two years and $1.2 billion in expenses later, the banks now have the required system in place to do so.

Understanding The Impact on British Banks

But now what? Does this mean all the customers who have any problem with the services provided by their bank will shift their accounts to another bank? Not quite likely. The fact that only about 2.5% of customers in the U.K. shift their accounts between banks a year, seems to indicate that people are largely happy with the way things are. No doubt this figure will increase, but we don’t expect it to be something drastic. Especially because the banks are now hard at work advertising the benefits of their products and services compared to their competitors. Industry estimates that 6% of customers are likely to shift accounts every year with the new implementation, sums up expectations quite well. [1]

The big four banks won’t really worry about this figure. Thanks to the strong presence each one of them has in the region, they are more likely to swap customers among them rather than lose market share to the other competitors. We believe that the only notable impact for them will come in the form of increased marketing-related expenses which would include advertising costs as well as additional costs incurred to provide perks and discounts to existing or new customers. As can be understood by making changes to the chart above which shows retail banking expenses as a percentage of revenues for RBS, this in itself presents a small downside to the value of the bank.

So, should we expect similar changes in the banking sector of other countries too? Financial regulators around the globe have shown an interest in this first-of-its-kind implementation. But with very few countries having to deal with such a high degree of concentration in their banking sector as seen in U.K., we really don’t think this would be very high on their priority list – at least for the next couple of years.

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  1. U.K. Tries Again on Banking Competition, Sep 17 2013 [] []
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