What if there was a fast and easy way to move your checking account from one bank to another? Imagine if you could make the switch with a few clicks of the mouse, and then have payments to or from your old account automatically processed by your new bank, with no need to notify any payees or billers?
Well, this system already exists, in the UK.
About six months ago, as part of a larger competition initiative, the UK Payments Council instituted an online system allowing customers to move their accounts from one bank to another in as little as seven working days. Previously it took up to 30 days to switch, and banks and payments to or from the old account ran the risk of being rejected in the interim.
Here’s how the new system works: Customers set up the switch via an industry-sponsored website or call their new bank with their existing account information. At this point, the new bank informs the old bank and payments are automatically redirected for 13 months (in order to cover any annual payments). It’s worth noting that the program comes with a guarantee: any fees or interest charges incurred as a result of the switch are refunded by the new bank.
To date, the lion’s share of UK banks have signed up, at a cost of $750 million to the banking industry. Data suggest the new system is having an effect. In the three months after the initial launch, more than 300,000 account switches took place, a 17 percent increase on the year before. Some 99.6 of these switches have taken place within the guaranteed seven-day transition period.
Could this type of switch plan be instituted in the US? No doubt banks here would cry foul. The number of UK banks accepting consumer deposits can be counted in the dozens, while the US maintains nearly 7,000 banks in operation.
Yes, the costs of setting up a system to enable might be higher, but the benefits to the consumer would be appreciable. It would be easier for customers to shop around, or to consolidate accounts and take advantage of bundled pricing, for example.
Some might say there is enough competition in the market. After all, the top four banks in the UK control 75 percent of the consumer banking market, with Lloyds and its sub-brands holding a resounding 28 percent.
US banks, on the other hand, are limited by law to 10 percent deposit share. But those who know the US banking market will confirm that competition exists more on paper than on the ground, and that barriers to switching accounts remain significant.
Consumers can only benefit from more choice in how they manage their money. That choice is arriving anyway, from the likes of Simple, payment companies such as Square and tech companies such as Apple and Google. Banks need to build their competitive muscle fast or risk becoming ‘dumb pipes’: back-end processors of transactions for the consumer-friendly interfaces offered by payment companies and other non-banks.