Competition Authority says banks are not competitive

[Brendan Burgess]

IRISH BANKING SECTOR IS NOT WORKING WELL FOR SMALL BUSINESS OR PERSONAL CUSTOMERS ACCORDING TO THE COMPETITION AUTHORITY

The Competition Authority today (22nd September) published its report Competition in the (non-investment) banking sector in Ireland. The report points out that banks in Ireland do not compete aggressively for customers.

The Report has identified anti-competitive problems in the three sectors examined, which were personal current accounts, lending to small business and the crucial role of the payments clearing system. The Competition Authority makes 25 recommendations intended to mitigate these problems and make the banking industry more competitive. Specifically The Competition Authority recommends that regulation of bank charges should not be removed until competition improves. The Competition Authority’s recommendations are intended to

· make it easier for personal customers & businesses to move their bank
accounts;

· make it cheaper for small business to access working capital; and,

· make it easier for new banks to offer services to Irish customers.

According to John Fingleton, Chair of The Competition Authority; “Competition should make financial institutions more responsive to the needs of Irish customers. The Competition Authority has identified a number of areas where competition is not allowed to develop freely and unencumbered and we have made appropriate recommendations. These recommendations will have a significant impact, and will have knock-on effects in other areas of banking

Since the commencement of The Competition Authority’s Study numerous changes have taken place within the Irish banking sector. Some of these changes have anticipated The Competition Authority’s recommendations. During 2004, the Irish Bankers Federation (IBF), the Irish Payments Services Organisation (IPSO) and the Department of Finance all announced their intentions to remove some of the more troublesome restrictions on competition in banking. The Minister for Finance has endorsed the removal of the double-taxation stamp duties on customers who switch banks. Entry barriers to the Payments Clearing System, which inhibit entry into the Irish banking market, have been substantially reduced by the clearing organisations. The Bankers’ Federation has also introduced a switching code that will facilitate bank rivalry and make switching banks easier for Irish consumers.

The Competition Authority’s report outlines what remains to be done in the
Irish banking sector. Competition in the (non-investment) banking sector
in Ireland delivers a total of 25 recommendations, addressed to the government, the Financial Regulator, the clearing companies, and the banks under the following headings

· Personal Current Accounts
· Loans to small business
· The Payments Clearing System


Personal Current Accounts

Customers with personal current account are effectively locked in to their existing service because it so difficult to change banks. This problem comes from structural arrangements within the banking sector, the behaviour of the banks themselves, and unintended consequences of Government regulation. The result is that banks don’t compete for existing account holders but fight aggressively for customers who are opening accounts for the first time (for example college students)

Recommendations on Personal Current Accounts

1. Improve the switching code for personal current accounts (partly
implemented)

2. Develop a transferable direct debit

3. End double taxation of plastic cards (partly implemented)

4. Assess the distortionary costs of the current level of stamp duty

5. Standardise acceptable forms of identification

6. Remove Price Regulation once competition improves

7. Provide free 12-month credit account records

8. Provide personal current account interest rate information

9. Promote personal current account interest rate awareness


Loans to small business

Small businesses are not benefiting from competition particularly in the vital area of working capital lending. Banks are not passing on interest rate decreases to their Small and Medium Enterprises (SME) lending customers. This problem is costing small businesses and estimated €85 million a year

Recommendations on Loans to Small Business

1. Implement an Effective Switching Code for Small businesses

2. Make it easy to compare current accounts

3. Provide free 3-year account history

4. Develop standard mortgage document

5. Facilitate easier transfer of mortgages


Payments Clearing System

The Competition Authority is concerned that the structure of the payment clearing system has inhibited new banks offering services in Ireland. The payments clearing system performs a crucial role in the Irish banking system. Financial institutions who want to offer a broad range of banking services need access to the payment clearing system to process transactions which their customers conduct with customers of other banks

Recommendations on the Payments Clearing System

1. Create a single Board of Directors for the Payments System

2. Expand the membership of IPSO

3. Publicise decisions and actions of the payments industry

4. Clarify status of An Post and credit unions in the payments industry

5. Make key non-confidential IPSO documents available

6. Analyse new technology for clearing electronic copies of cheques

7. Implement legislation to recognise electronic copies of cheques

8. Implement legislation to re-assign ownership of cheques

9. Update clearing rules to facilitate electronic copies of cheques

10. Investigate the establishment of an Automated Clearing House

11. Devise an action plan for implementing an Automated Clearing House

The Competition Authority’s report Competition in the (non-investment) banking sector in Ireland is available from the Authority’s website www.tca.ie/banking.html

 

[Brendan Burgess]

This is an extract of a submission I made on their interim report. They don't seem to have dealt with any of the criticisms I made:

These are my personal views and not the views of any organisation or group to which I belong.


Overview

This study and is so deeply flawed that little confidence can be placed in its recommendations. Such a flawed report does not serve the interests of consumers. It is also a very poor use of taxpayers’ money.


The chief flaw is that it studies two small sectors of the banking market and based on these, it makes a huge, and unjustified jump to conclude that banking in Ireland is not competitive. The only conclusion which could possibly be justified by its findings is that there is inadequate competition in these two aspects of banking.


The two most significant aspects of banking for Irish consumers are the provision of home mortgages and the provision of deposit accounts. These two areas are highly competitive and yet the study makes no comment on these.


The study concludes that lending to SMEs is not competitive. It studied two areas – term loans and working capital loans. It discovered that term loans were actually competitive and does not highlight this.

Banking in Ireland is competitive in the key areas

The main items affecting personal consumers are deposit rates and mortgage rates. At the moment, the best available demand rate is from Northern Rock which is 2.6%. And the best available mortgage rate is from National Irish Bank which is 2.8%. This is competition at its very toughest. It is not possible to run a banking system on margins of .2%. Of course some people are foolishly paying 5% to some mortgage lenders and many people have money in current accounts on which no interest is being paid. But don’t blame the lack of competition for that. Blame consumer inertia.



The Competition Authority should highlight why the mortgage market is so competitive. The main reason is that the Bank of Scotland came in and shook up what was an uncompetitive market. They faced few barriers to entering the Irish market.



[font=&quot]Ask any consumer which would they prefer, cheaper mortgages or cheaper current account charges? They should prefer cheaper mortgages but studies like this cause consumers to focus on the wrong areas for shopping around. [/font]

 

[daltonr]

I'm glad you posted this because I thought I was having a severe case of Deja Vu yesterday. I distinctly remember sitting in my car listening to Morning Ireland a year perhaps two years ago listening to exactly the same conversation I listened to yesterday.

Someone claiming Irish banks weren't competitive, that the clearing system was a closed shop, that there was no code for transferring from bank to bank.

At the time I think there was some merit to some of the points made. Specifically there wasn't a Code for transferring from bank to bank easily.

What I couldn't understand was why I was listening to details on a new report from the competition authority coming out just yesterday, and being presented as if this was all new info.

There now is a code for transferring personal current accounts.
There are a number of options for free personal banking.

Was it John Fingleton who was speaking for the competition authority yesterday? He and his report are about two years too late. He said they had focused on the personal current accounts because they are the most important gateway product.

Surely they did enough preliminary research to know that this product was already much more compeditive than it used to be. There might be still some merit to raising the issue of the banks clearing systems being a company owned by the banks. But on the whole this sounded like a report that rehashed an issue we all knew about 2 years ago and covered issues that are already being or have been fixed.

How can a product be uncompetitive when there are at least two players in the market giving it away free of charge? The only thing you pay is damn government imposed taxes on cards and in some cases double taxes.

How much did this pointless report cost to produce? What areas of actually anti-compeditive behaviour were ignored while this report was being worked on?

I can think of a number of anti-compeditive practices off the top of my head that cost people much more than they would ever spend on current account charges.

We need to introduce a second competition authority. A bit of competition might drive the standard up a bit and give us better value
for money.

-Rd