Brendan Burgess
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Reprinted with permission from the Irish Banker’s Federation magazine
Is Irish Banking Competitive? A Customer Viewpoint
Brendan Burgess, Campaigner on Consumer Finance issues
The banking market here is competitive but customers are not doing enough themselves to benefit from this, says Brendan Burgess.
The Competition Authority stated in 2005 that banks did not compete aggressively for customers; but it would, wouldn’t it? The banking industry says that it does compete aggressively for customers. Which should we believe?
So why not ask the customer? Ask anyone who has shopped around for a mortgage recently. Their answer will be a resounding yes. Lenders are fighting each other for the business. And they are fighting on the most important aspect - rates. Anyone who has not got a bad credit record will get a very good deal at the moment. In fact, institutions are competing so hard that they are being accused of irresponsible lending. If the lenders were to act “responsibly” and to agree amongst themselves not to lend more than 80% loan to value and not to lend more than four times salary, the Competition Authority would be down on them for anti-competitive behaviour.
Inertia the problem, not lack of competition
Lenders have been forced to compete as switching a mortgage has become very easy for consumers. Lenders are not allowed to charge early repayment penalties on variable rate mortgages and these account for around two-thirds of all mortgage loans approved. Competition among solicitors means that it will cost consumers less than €1,000 to switch. And many institutions will offer good rates and pay the solicitor’s fees. It really can’t get any more competitive.
So is Irish banking competitive? Why not ask the person who has money to put on deposit? The best available deposit rate is around 4% from Northern Rock which is actually higher than the cheapest mortgage rate of around 3.75% from National Irish Bank. Most money on deposit is earning less than 4% and most mortgages are costing more than 3.75%. However, that is not the fault of the banks, but the fault of people who fail to shop around.
It is very easy to switch deposits. If people have large balances earning less than 1% when they could switch to an account that would earn them 4%, don’t blame the lack of competition.
This all came starkly together at the Annual General Meeting of the EBS Building Society, for example. As a mutual which is not trying to maximise profit, one would expect it to pay the best deposit rate and charge the lowest mortgage rate. Before the Irish market got competitive a few years ago, the EBS was able to achieve this. However, a speaker from the floor at its recent AGM complained about being a member of the EBS for years and earning a very low deposit rate. The next speaker complained that their mortgage rate is no longer the lowest in the market. The reality is, however, that it is difficult for any bank to pay the best deposit rate in the market and to charge the lowest mortgage rate in the market, when the best deposit rate exceeds the cheapest mortgage rate!
What about charges on current accounts?
What about them? They really are insignificant in the overall scheme of things. I choose my current account on the basis of the service I get. The primary issue for me is a good Internet offering. I get that from my current bank. Overall they are fairly efficient. They have made mistakes on my accounts in the past, but they have corrected them.
How much do I pay? It works out at about €80 a year. How much do I pay on my mortgage? Around €20,000 a year. Which one do you think I shop around for?
As far as my current account is concerned, I would not switch to save e80 and run the risk of getting a bad service. If the service from my current bank deteriorates, I will switch. But I will not choose the new bank on the basis of price.
Inertia, not lack of competition, is the biggest barrier to getting a good deal. Irish consumers are well off and most of them just will not shop around. They are too busy making money and spending it. When the typical Irish consumer walks into a car showroom, he or she is thinking of engine size, colour and what he will look like driving around in the new model. He is not thinking about the price of financing it and so will enter into an expensive, inflexible hire purchase agreement without really thinking about the financial consequences. The banks cannot be blamed too much for taking advantage of this lucrative market - the primary blame rests with the consumer.
Information further driving competition
A dramatic increase in information has encouraged the banks to become more competitive. The amount of coverage that is given to personal finance issues has increased in the newspapers over the past ten years or so. Every paper has one or more journalists specialising in personal finance. Most papers publish ‘Best Buys’ tables. It is easy to find the best deposit rate, the lowest mortgage rate, the cheapest life insurance, the lowest charging stockbroker. It is easy to shop around as the information is readily available.
The Internet has also helped to make shopping around much easier. No longer is there a need to ring around to find the best rates. You can find them easily on company websites. Additionally, you can compare different products on sites such as www.askaboutmoney.com, where consumer discussions also take place whenever there is a new product or a change to an existing product.
Add to this mix the consumer publications programme of the Financial Regulator’s Consumer Information Section. The Regulator is doing a very good job on the information front, with its fact sheets and cost surveys obtaining widespread publicity on the airwaves and in the newspapers. Its website, www.itsyourmoney.ie also provides comprehensive information.
Competition and profitability
Competition and profitability are not mutually exclusive. Banks make huge profits in the Irish market. So the media jumps on this as proof of a lack of competition. But the reality is that banks are competing vigorously with each other. Mortgages, deposits, current accounts, car loans and, to a lesser extent, credit cards, all are keenly priced.
There was a time when the Irish mortgage market was not very competitive. Margins were about the highest in Europe. Bank of Scotland (Ireland) entered the market and cut lending rates by about one percentage point. In the process that bank has not built up a very large market share, but it has forced all of the other mortgage providers to react.
Some concern existed at the time about the impact of this development on the profitability of Irish mortgage lenders. But what has happened? Their profits have increased dramatically! While this is due in the main to the huge growth in lending, competition has also forced lenders to become more efficient and has probably helped them to become more profitable in the longer term.
Product innovation is often used as an indicator of competition. With so many institutions competing for new business, they have to bring out new products to distinguish themselves from their rivals. Over the last ten years we have seen the scrapping of entry and exit charges on many investment products. We have seen the introduction of current account mortgages, offset mortgages and tracker mortgages. We have witnessed the introduction of online banking. Stockmarket investors can now invest in an ISEQ Exchange Traded Fund with an annual charge of 0.5%. We have seen the introduction of execution only investment brokers where nil commission products can be bought or where the commission can be refunded to customers. And we have seen the introduction of the IBF Personal Switching Code, under which customers can more easily switch their current accounts from one provider to another.
Can we have too much competition?
A major push is underway at European Commission level to harmonise EU legislation in order to create a single European financial services market. I would be concerned that this would not be to the benefit of the Irish consumer. Irish consumers of financial services are currently well protected under the Consumer Credit Act, the Financial Regulator and the Financial Services Ombudsman. Further European harmonisation could weaken this level of protection for the theoretical benefit of allowing other product and service providers easier access to the Irish financial services market. I see very little potential benefit from such harmonisation and the ensuing competition. If Irish consumers are not prepared to shop around within Ireland, I find it very hard to see them putting their money on deposit in Lithuania for an extra 0.2%, for example.
Another example relates to overseas investment funds. Up to a few years ago, the tax treatment of overseas unit-linked funds made them very unattractive to Irish investors. It was argued that this allowed Irish fund managers to levy very high charges as there was no competition from abroad. The tax rules were changed in due course to remove this disadvantage. However, few Irish people have bought these foreign funds; nor have I seen any advertisements targeted at Irish customers. We still only trust our money to the big names that are familiar to us and have a physical presence in Ireland.
Treating customers fairly
Better treatment of customers could become an area of competitive advantage between providers of financial services. Despite the dramatically improved lot of the Irish financial consumer, there is still a view out there that the customer is put upon and exploited. The Financial Regulator and the Financial Services Ombudsman are highlighting and quantifying instances of overcharging. While one can expect system problems and human error to give rise to charging issues, there seems to be very few examples of undercharging. This is odd. One would expect the errors to be in both directions. But undercharging does not seem to happen. I don’t think that it’s a question of consumers not reporting cases of undercharging; rather, I don’t think it’s happening very much.
Financial institutions could seek to differentiate themselves from one another by publicly committing to Treating Customers Fairly. They could put this at the centre of the product offering: by highlighting the complaints procedure, ensuring that they have the systems in place to respond quickly when there is a complaint and by designating a senior employee as a customers’ advocate - much as the appointed actuary is for life companies. Additionally, they could examine their product advertising to determine if it can be made clearer and fairer - by highlighting the exclusions and conditions as well as the benefits.
Take credit card interest calculations as an example. To the best of my knowledge all credit card companies use the same complicated way of providing interest free periods. None explains the restrictions prominently. To qualify for the interest free period, one has to pay the full balance by the due date. If one does not pay the full balance, then the full interest is charged from the date of the transaction. This causes great annoyance to the customer who, for example, has a balance of €2,050, pays €2,000 for convenience expecting interest to be charged on the €50, but ends up paying interest on the €2,050 until the date that the partial payment was made.
Why is this the only way interest is charged? Why does one institution not break ranks and give an interest-free period on all purchases paid off by the due date, irrespective of whether one’s balance is paid off in full or not? Why does some institution not give a straight 30-day interest free period on all purchases irrespective of whether it is paid in part or in full? If someone were to break ranks on this, it would give them a huge competitive advantage and would be a further sign of treating customers fairly.
Though writing here in a personal capacity, Brendan Burgess is founder of the website askaboutmoney.com where you can discuss this article.
Is Irish Banking Competitive? A Customer Viewpoint
Brendan Burgess, Campaigner on Consumer Finance issues
The banking market here is competitive but customers are not doing enough themselves to benefit from this, says Brendan Burgess.
The Competition Authority stated in 2005 that banks did not compete aggressively for customers; but it would, wouldn’t it? The banking industry says that it does compete aggressively for customers. Which should we believe?
So why not ask the customer? Ask anyone who has shopped around for a mortgage recently. Their answer will be a resounding yes. Lenders are fighting each other for the business. And they are fighting on the most important aspect - rates. Anyone who has not got a bad credit record will get a very good deal at the moment. In fact, institutions are competing so hard that they are being accused of irresponsible lending. If the lenders were to act “responsibly” and to agree amongst themselves not to lend more than 80% loan to value and not to lend more than four times salary, the Competition Authority would be down on them for anti-competitive behaviour.
Inertia the problem, not lack of competition
Lenders have been forced to compete as switching a mortgage has become very easy for consumers. Lenders are not allowed to charge early repayment penalties on variable rate mortgages and these account for around two-thirds of all mortgage loans approved. Competition among solicitors means that it will cost consumers less than €1,000 to switch. And many institutions will offer good rates and pay the solicitor’s fees. It really can’t get any more competitive.
So is Irish banking competitive? Why not ask the person who has money to put on deposit? The best available deposit rate is around 4% from Northern Rock which is actually higher than the cheapest mortgage rate of around 3.75% from National Irish Bank. Most money on deposit is earning less than 4% and most mortgages are costing more than 3.75%. However, that is not the fault of the banks, but the fault of people who fail to shop around.
It is very easy to switch deposits. If people have large balances earning less than 1% when they could switch to an account that would earn them 4%, don’t blame the lack of competition.
This all came starkly together at the Annual General Meeting of the EBS Building Society, for example. As a mutual which is not trying to maximise profit, one would expect it to pay the best deposit rate and charge the lowest mortgage rate. Before the Irish market got competitive a few years ago, the EBS was able to achieve this. However, a speaker from the floor at its recent AGM complained about being a member of the EBS for years and earning a very low deposit rate. The next speaker complained that their mortgage rate is no longer the lowest in the market. The reality is, however, that it is difficult for any bank to pay the best deposit rate in the market and to charge the lowest mortgage rate in the market, when the best deposit rate exceeds the cheapest mortgage rate!
What about charges on current accounts?
What about them? They really are insignificant in the overall scheme of things. I choose my current account on the basis of the service I get. The primary issue for me is a good Internet offering. I get that from my current bank. Overall they are fairly efficient. They have made mistakes on my accounts in the past, but they have corrected them.
How much do I pay? It works out at about €80 a year. How much do I pay on my mortgage? Around €20,000 a year. Which one do you think I shop around for?
As far as my current account is concerned, I would not switch to save e80 and run the risk of getting a bad service. If the service from my current bank deteriorates, I will switch. But I will not choose the new bank on the basis of price.
Inertia, not lack of competition, is the biggest barrier to getting a good deal. Irish consumers are well off and most of them just will not shop around. They are too busy making money and spending it. When the typical Irish consumer walks into a car showroom, he or she is thinking of engine size, colour and what he will look like driving around in the new model. He is not thinking about the price of financing it and so will enter into an expensive, inflexible hire purchase agreement without really thinking about the financial consequences. The banks cannot be blamed too much for taking advantage of this lucrative market - the primary blame rests with the consumer.
Information further driving competition
A dramatic increase in information has encouraged the banks to become more competitive. The amount of coverage that is given to personal finance issues has increased in the newspapers over the past ten years or so. Every paper has one or more journalists specialising in personal finance. Most papers publish ‘Best Buys’ tables. It is easy to find the best deposit rate, the lowest mortgage rate, the cheapest life insurance, the lowest charging stockbroker. It is easy to shop around as the information is readily available.
The Internet has also helped to make shopping around much easier. No longer is there a need to ring around to find the best rates. You can find them easily on company websites. Additionally, you can compare different products on sites such as www.askaboutmoney.com, where consumer discussions also take place whenever there is a new product or a change to an existing product.
Add to this mix the consumer publications programme of the Financial Regulator’s Consumer Information Section. The Regulator is doing a very good job on the information front, with its fact sheets and cost surveys obtaining widespread publicity on the airwaves and in the newspapers. Its website, www.itsyourmoney.ie also provides comprehensive information.
Competition and profitability
Competition and profitability are not mutually exclusive. Banks make huge profits in the Irish market. So the media jumps on this as proof of a lack of competition. But the reality is that banks are competing vigorously with each other. Mortgages, deposits, current accounts, car loans and, to a lesser extent, credit cards, all are keenly priced.
There was a time when the Irish mortgage market was not very competitive. Margins were about the highest in Europe. Bank of Scotland (Ireland) entered the market and cut lending rates by about one percentage point. In the process that bank has not built up a very large market share, but it has forced all of the other mortgage providers to react.
Some concern existed at the time about the impact of this development on the profitability of Irish mortgage lenders. But what has happened? Their profits have increased dramatically! While this is due in the main to the huge growth in lending, competition has also forced lenders to become more efficient and has probably helped them to become more profitable in the longer term.
Product innovation is often used as an indicator of competition. With so many institutions competing for new business, they have to bring out new products to distinguish themselves from their rivals. Over the last ten years we have seen the scrapping of entry and exit charges on many investment products. We have seen the introduction of current account mortgages, offset mortgages and tracker mortgages. We have witnessed the introduction of online banking. Stockmarket investors can now invest in an ISEQ Exchange Traded Fund with an annual charge of 0.5%. We have seen the introduction of execution only investment brokers where nil commission products can be bought or where the commission can be refunded to customers. And we have seen the introduction of the IBF Personal Switching Code, under which customers can more easily switch their current accounts from one provider to another.
Can we have too much competition?
A major push is underway at European Commission level to harmonise EU legislation in order to create a single European financial services market. I would be concerned that this would not be to the benefit of the Irish consumer. Irish consumers of financial services are currently well protected under the Consumer Credit Act, the Financial Regulator and the Financial Services Ombudsman. Further European harmonisation could weaken this level of protection for the theoretical benefit of allowing other product and service providers easier access to the Irish financial services market. I see very little potential benefit from such harmonisation and the ensuing competition. If Irish consumers are not prepared to shop around within Ireland, I find it very hard to see them putting their money on deposit in Lithuania for an extra 0.2%, for example.
Another example relates to overseas investment funds. Up to a few years ago, the tax treatment of overseas unit-linked funds made them very unattractive to Irish investors. It was argued that this allowed Irish fund managers to levy very high charges as there was no competition from abroad. The tax rules were changed in due course to remove this disadvantage. However, few Irish people have bought these foreign funds; nor have I seen any advertisements targeted at Irish customers. We still only trust our money to the big names that are familiar to us and have a physical presence in Ireland.
Treating customers fairly
Better treatment of customers could become an area of competitive advantage between providers of financial services. Despite the dramatically improved lot of the Irish financial consumer, there is still a view out there that the customer is put upon and exploited. The Financial Regulator and the Financial Services Ombudsman are highlighting and quantifying instances of overcharging. While one can expect system problems and human error to give rise to charging issues, there seems to be very few examples of undercharging. This is odd. One would expect the errors to be in both directions. But undercharging does not seem to happen. I don’t think that it’s a question of consumers not reporting cases of undercharging; rather, I don’t think it’s happening very much.
Financial institutions could seek to differentiate themselves from one another by publicly committing to Treating Customers Fairly. They could put this at the centre of the product offering: by highlighting the complaints procedure, ensuring that they have the systems in place to respond quickly when there is a complaint and by designating a senior employee as a customers’ advocate - much as the appointed actuary is for life companies. Additionally, they could examine their product advertising to determine if it can be made clearer and fairer - by highlighting the exclusions and conditions as well as the benefits.
Take credit card interest calculations as an example. To the best of my knowledge all credit card companies use the same complicated way of providing interest free periods. None explains the restrictions prominently. To qualify for the interest free period, one has to pay the full balance by the due date. If one does not pay the full balance, then the full interest is charged from the date of the transaction. This causes great annoyance to the customer who, for example, has a balance of €2,050, pays €2,000 for convenience expecting interest to be charged on the €50, but ends up paying interest on the €2,050 until the date that the partial payment was made.
Why is this the only way interest is charged? Why does one institution not break ranks and give an interest-free period on all purchases paid off by the due date, irrespective of whether one’s balance is paid off in full or not? Why does some institution not give a straight 30-day interest free period on all purchases irrespective of whether it is paid in part or in full? If someone were to break ranks on this, it would give them a huge competitive advantage and would be a further sign of treating customers fairly.
Though writing here in a personal capacity, Brendan Burgess is founder of the website askaboutmoney.com where you can discuss this article.