Is bank account portability a viable route for increased competition in the banking industry?

One of the recurring topics for increased competition in the banking sector is account number portability. Just like number portability evened the playing field between consumers and service providers in the telco industry, is it possible to achieve the same effect in the banking industry?

Even though the number of consumers that have reportedly switched banking providers is increasing, the number is relatively low. For the Norwegian market, only 13 percent of banking customers switched banks in 2018. Although this may seem low, it is an increase from historical numbers of only 5 percent churn. The amount is even lower in the Dutch market, where around 2% of people in the Netherlands switch their payment account. That figure is slightly below the European average. For the US market, the average consumer use the same primary account for 16 years, and in the same year, only 4 percent of consumers switched banks.

According to the Dutch central bank, the main reason why customers do not switch is that they are satisfied with their current bank. The reason that follows is that switching offers insufficient benefits or insufficient obvious benefits. The third reason why people do not change their bank account is that they cannot take their account number with them when they switch.

With this in mind, it may be tempting to replicate the telco industry by introducing mandated account number portability similar to the introduction of mobile number portability (MNP), as the effect on the telco industry was undeniable positive for the consumer. According to research, the introduction of MNP contributed to reduced switching costs and thus strengthening competition in the market. The direct result of this was increased customer switching and lower prices.

Another research paper on the effect on MNP suggests that number portability will make the price, market share, and the profit of the incumbent decrease while those of the entrant increase. In a dynamic setting, number portability will make both of the operators take competition strategies besides cutting prices, such as improving the quality of their products, and the scale of the market will be expanded. In a word, the introduction of number portability has the effect of making the telecommunication market more competitive.

Although it is tempting to replicate the success of the telco industry, bank account portability is far more complex. In addition to the technical complexity involved for each individual bank, it would be impossible to implement this on a national level and only be feasible at minimum EU level in order to align with the goals of the Single Euro Payments Area. This would require changing the IBAN system, as the IBAN contains a bank-specific code that is crucial for routing payment instructions.

Another aspect to consider is consumer behavior and how this differs across industries. Although there are cross-industry similarities between banking and telcos, banking is different from telecom. Customers often maintain parts of their customer relationship with their old bank when switching banks, thus having multiple bank accounts with different banks. A study conducted by the Financial Conduct Authority in the UK on the effectiveness of the Current Account Switch Service (CASS) and evidence on account number portability also suggests that the main barrier for switching banks is inertia and the lack of a trigger to consider switching.

Although Account number portability is considered one potential solution to increase account switching, several stakeholders are questioning the cost/benefit of implementing account number portability. The majority of firms that were surveyed in the study on account number portability viewed the concept as expensive, with the associated benefits significantly outweighed by the costs

Consumer organizations, while appreciating the benefits that such a system would give consumers, were also cautious about account number portability, arguing that the real barriers to switching do not lie in the infrastructure but in the choice and differentiation of the current accounts available.

One of the proposed methods to implement account number portability is an alias-based solution, where a unique identifier is linked to the IBAN, and the customer retains their identifier and leaving the IBAN behind. When a consumer or business switches banks, their alias remains unchanged, while the underlying bank account number changes. This would reduce the hassle involved in a switch. As this can only be achieved if everyone uses aliases instead of IBANs, it must be enforced by law.

This has been proposed by both the Financial Conduct Authority in the UK, The Dutch Central Bank as a potential solution that is less technically complex than number portability. The Reserve Bank of India has initiated the process of creating a unique customer identification code (UCIC) to allow for bank account portability.

However, an alias-based solution has proved to be more costly than the potential benefits. If an alias should be implemented, it had to fulfill certain criteria, such as being both self-validating and stable.  The use of self-validating numbers ensures that a typing error does not result in an incorrect payment and that consumers and companies can verify whether aliases are valid. Stability means that the alias of the person, business, or institution does not change. An analysis by SEO Amsterdam Economics concludes that the cost of introducing an alias that meets the criteria for robustness significantly outweighs the potential benefits.

Introducing an alias-based system on a national level would also potentially be in conflict with the intention of increased competition in the sector, as this would raise the entry barriers for foreign market entrants.

In conclusion, Bank Account Portability still seems far from reality despite repeated attempts to investigate the feasibility of a viable solution. Over time, the benefits of bank account portability also decrease as digital innovations such as the Current Account Switching Service in the UK, Overstapservice in the Netherlands, card tokenization, and initiatives such as eFaktura to any bank in Norway reduces the friction related to switching banks.

Even though Account Number portability would increase the number of bank switches, the actual benefits would still be relatively low as the efficiency gain is marginal, and after all, the main reason for high retention rates in banking is due to inertia and a perceived hassle rather than an actual switching barrier.  

3 thoughts on “Is bank account portability a viable route for increased competition in the banking industry?

  • September 14, 2021 at 9:57 am
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    En bra oppsummering av denne saken Christoffer! Spesielt kompleksisteten og risikoen knyttet til å innføre kontonummer portabilitet må ikke undervurderes! (For ikke å snakke om kostnadene….)
    Håper du har sendt denne artikken direkte til diverse norske politikere…..

    Reply
    • September 14, 2021 at 10:06 am
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      Personlig mener jeg dette er fullstendig urealistisk å få til. Det ligger for mye logikk i kontonummerstrukturen både nasjonalt og på tvers av landegrenser til at dette er teknisk gjennomførbart uten astronomiske investeringer på tvers av både kjernebanksystemer og betalingsinfrastrukturen. Jeg trodde en alias-basert løsning kunne være en work-around, men etter å ha lest utredningen fra den Nederlandske sentralbanken har jeg slått også dette fra meg som en løsning.

      Reply
      • September 14, 2021 at 11:05 am
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        Var med på en del diskusjoner i bransjen knyttet til hvordan kontonummer portabilitet kunne løses i Norge, enten med alias eller ved å endre dagens oppbyggingen av kontonummer. Konklusjonen var litt som da vi så på muligheten for å endre den norske løsningen for personnummer en del år tidligere: “Blir dette vedtatt er det best å emigrere!”

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