By Jeff Poole, Principal Advisor, Financial Services, KPMG in the UK.
The introduction of the Current Account Switch Service in the UK on16 September 2013 is heralded by many as a watershed moment in a stagnant British retail banking market. So much so, that many organizations are considering introducing current accounts to snap up unhappy bank clients and draw them to their own core product lines.
However, it’s critical for prospective new entrants to carefully build a business case and closely examine the risks, costs and opportunities before taking the plunge, whatever your home market may be.
The surge of interest in current accounts was triggered by the recent divestment of branches and services by several big British banks to qualify for EU aid programs. The UK banking industry is now rolling-out technology to help disgruntled customers switch accounts to another provider in seven working days, and for 13 months easily reroute automated payments and deposits made in error to the old account.
In light of low satisfaction levels among UK bank customers, many observers anticipate a wave of account switches later this year and next. Enter a crowded field of new competitors and alternative providers, from established retailers to niche financial service providers.
The logic for a grocer, telco or candlestick-maker to become a banker? They admire the bank ‘hub and spoke’ model by which a current account is a natural hub to build customer relationships. Through scale and volume, banks offset the fixed costs and collect powerful customer data to cross-sell more profitable products and services.
So what’s the problem? First, there is no guarantee that the wave of account switchers will materialize. While shoppers will change shampoo or burger brands for a better offer, it’s harder to make the leap of faith with one’s financial affairs, especially if there is a risk of disrupting the embedded provision of automatic bill payments and salary deposits. As evidenced by nearly two-thirds of bank customers having held the same account for five years or more, according to Consumer Intelligence, the consumer survey company.
Also, the UK’s new fast-switch process may not impress consumers who are accustomed to instant, mobile switching, by which they can transfer their mobile phone number between carriers in 48 hours. Until every banking customer has the equivalent of a current account PAC code - and switching becomes truly seamless – consumers may be reluctant to leave their bank.
Even if a flood of consumers decides to abandon their bank for alternative providers, it is not proven that the hub and spoke model will work for non-financial services firms. It may be wiser to invest in capabilities which allow consumers greater access to their money with a financial institution partner, rather than building an actual in-house transaction banking service.
In terms of investment, any firm now thinking about entering the current account market from scratch can expect this to represent significant investment over an 18-24 month period before they are ready to launch.
With all of this in mind, it’s essential to first build a robust business case to assess whether current accounts will provide your firm with adequate revenue and growth, whether you can deliver a compelling service proposition, and implications for your existing operating model.
Our Advisory Services group has helped clients and their boards make these strategic decisions and plan subsequent implementations. For some organizations, this means diving into the current account pool – and potentially transforming their business – while others are building a ‘bank in a box’ to become a white label provider. Others will chart alternative courses to growth, focused on their firm’s core product set.
There will be much marketing ‘hype’ over coming months, and likely a notable increase in account switching activity. Observers in the UK and around the world will be watching to see if new entrants can reap the rewards, or whether current accounts are best left to the usual retail banking suspects.