economics essay 1




Section A: Please read the two case studies below and answer only Two out of the Three


SEEN questions.


Bank accounts: OFT says significant change needed BBC: 25 January 2013


UK bank customers still have relatively little choice of personal current accounts and significant changes are needed, a regulator has said. The Office of Fair Trading (OFT) said there was a “lack of dynamism” from the banks alongside customer inertia.


Despite improvements since its last review in 2008, it said consumers still lacked confidence to switch accounts. It suggested a review into whether customers could take their account number with them when switching banks. But the OFT chose not to refer the market to the Competition Commission – a decision welcomed by the banks.


Portable account numbers


The OFT has been reviewing the way the UK’s banks run these accounts, because of concerns over competition and a lack of focus on customers’ needs. The watchdog found that since it last studied the market in 2008, the £9bn market had become even more concentrated among the major banks. Lloyds, RBS, Barclays and HSBC now hold 75% of the market, the OFT said. “The financial crisis and recession have weakened the competitive constraint from the smaller providers,” the OFT’s report said.


“While there have been two new entrants in recent years – Metro Bank in 2010 and M&S Bank in 2012 – neither is yet in a position to provide a significant challenge to the established providers.” The hope is that more entrants will mean more competition, leading to better rates and treatment for customers who are willing to move to the best deal. The OFT made some new, specific recommendations on improving the market for customers. These included:


 If customers still fail to switch, there should be a review into bank account number portability – when customers can keep their account number even if they move to a new bank, similar to switching mobile phone providers


 Annual summaries of accounts should be available throughout the year, rather than sent just once through the post. This should make comparing accounts easier


 Banks should do more to advertise a text alert system, which sends a message when a customer is close to their overdraft limit


It said that these changes had the potential to have a positive impact on competition and therefore it had decided not to refer the industry to the Competition Commission.





Comparisons ‘difficult’


In the OFT’s 2008 report, the watchdog revealed that charges from unarranged overdrafts brought in 30% of their current account revenue. It criticised the banks for the complexity of these charges. Now, the OFT has reported the banks’ were no longer receiving such large sums. This meant savings of between £388m and £928m for consumers since 2008, though much of this was the result of pressure from the OFT rather than competition between the banks. It added that overdraft structures remained too complex.


Clive Maxwell, chief executive of the OFT, said that despite some improvements, the market for personal current accounts was still not serving consumers as well as it should. “Customers still find it difficult to assess which account offers the best deal and lack confidence that they can switch accounts easily. This prevents them from driving effective competition between providers,” he said.


But he added that there would be some major changes to the market taking place in the coming months, including the sale of Lloyds and RBS branches – as mandated by European competition authorities. These should increase competition and choice for customers, although the OFT said these had been “slow in many respects”. They also include a new, automated switching service, launching in September, that will automatically redirect payments to the new account, and complete the switch within seven working days for free.


Anthony Browne, chief executive of the British Bankers’ Association, which represents the major UK banks, said: “The banking industry is committed to modernising and improving current accounts so that customers get the best possible service. “We welcome the OFT’s decision not to refer this issue to the Competition Commission and will continue to work with them to make further improvements for customers and the wider economy.”



‘Free banking’: Good thing or barrier to competition?



By Kevin Peachey Personal finance reporter, BBC News


11 January 2012


If you believe that there is no such thing as a free lunch, then you will certainly think the same is true of a current account from a bank. The majority of customers do not pay a fee to their bank for the right to open and maintain a current account, but they are charged in other ways. Interest rates are lower than the levels offered with savings accounts or official rate set by the Bank of England. Charges are levied for going overdrawn without permission or for

making certain transactions.


 Is this method of charging stifling competition and making it too confusing for customers who might consider shopping around for a bank account on the basis of price? Or is it an acceptance that, unless they are offered added extras, customers have little appetite for paying a monthly fee to a bank for keeping their money safe?





The debate is not as clear-cut as you might think. Mike O’Connor is the chief executive of Consumer Focus, which has considerable power to act on behalf of customers. He says that the “perception” of free banking is not good for competition. “It is great not to have to pay for a bank account, but is not necessarily good for the consumer in the bigger scheme of things,” he says. “Bank accounts are paid for by people who make mistakes and go overdrawn – they

are often the least well-off and the least well-informed.” He says that no bank has totally broken ranks.


That may not be that surprising, given the relatively hostile reaction to suggestions that Virgin Money may charge £5 a month for a current account. The provider, which is attempting to gain a foothold in the High Street with the purchase of the good chunk of Northern Rock, says that customers will get a choice between a fee-charging account and a “free” account when it launches a current account offering in 2013.



Soiled reputation


It is often said that people in the UK are more likely to change their partner than they change their bank. Even if you accept that people would shop around more if they could compare the “price” of an account, could banks really attempt to bring in a monthly fee for all current accounts? Banks hardly have the best of reputations among the public at present. Add to that a whiff of suspicion about existing fee-charging accounts. The City regulator, the Financial Services Authority (FSA) says that one in five UK adults has a packaged bank account.


These current accounts have a monthly fee because benefits such as insurance or ticket discounts are bolted on. Other common elements of the package are commission-free foreign currency,


travel insurance, preferential overdraft deals, mobile phone insurance and breakdown assistance. But the FSA wants greater checks to ensure customers are eligible and aware of the insurance elements of the bundle. “We are concerned that it may be too easy at the moment for firms to sell customers something they do not understand or need,” the FSA’s Sheila Nicoll said in October.






So, if “free” banking is unfair, and fee-charging accounts offer a pathway to mis-selling, then what can be done to allow customers to shop around? The Independent Commission on Banking – the Vickers report – was published in September. It came up with a recommendation that customers’ annual statements explain the amount of “interest foregone” by a customer or, in other words, the price of having a current account rather than a savings account. Interest foregone is calculated by subtracting the amount of interest earned from current account from the amount of interest that could be earned had the consumer put his or her money in an account which earns higher interest, or put some of that money in savings.


“Transparency must also be improved so that customers can identify the products that best suit their needs, forcing banks to offer the prices and services that customers seek,” the report says. That may still be somewhat opaque for the busy bank customer. Andy Gadd, head of research at analysts the Lighthouse Group, says that price comparison websites can do the hard work for those looking to switch accounts to get the best deal. “Comparing current accounts isn’t necessarily easy but there are various comparison sites for those who want to review their banking facilities and find the best deal for their particular circumstances,” he says.


“All individuals are different and the fact is that different current accounts are designed for different people – simply saying that all current accounts must charge a fee rather than paying interest will not change this and will actually disadvantage some.”



‘Firing customers’



While, it may disadvantage some customers, it could be good for the big banks, argues banking analyst Jonathan Charley.”All of the big banks today have customers that they do not make any money from. These will be the types of customers that open a current account for their household money, for their book club, for their children, where the balances are low, transactions sizes are small and they have only one product,” he says. “The problem is that in today’s banking environment it is very difficult for a bank to fire customers. “However if


customers were made to pay directly for the services that they use then it would be far easier for the banks to adjust their charges to either makes the low balance and low transaction value customers profitable or, better still for the banks, to encourage those customers to take their business elsewhere.” Meanwhile, the banks themselves are doing their best to attract the proactive customer by offering incentives to switch – with a bit of a frenzy of offers introduced in January.


Gone are the days or a free clipboard and pen. Now, for example, the Halifax is offering £100 to new customers at the start of the switching process, HSBC is offering 6% interest for 12 months in its current account “January sale”, and the Co-operativeBank is dropping overdraft charges for existing customers for three months to keep them onboard. But anyone tempted by such offers needs to stay on their toes. “Customers should consider whether, despite the initial tempting offers, these accounts offer value over time,” says Kevin Mountford, at So, it seems, customers will have to stay engaged and informed if they want to pursue the best banking deal. Instead of simply looking

at a headline price – as they do in a store – the current account shopper needs to sit down with a calculator, a computer, and a considerable amount of time. The question remains – will they bother, or will they go out for lunch instead?



Section A [Seen]: Answer ANY TWO of the following Questions:


1 Evaluate the level of competition in the UK retail banking market, and, with reference to the ‘theoretical models’ of markets, indicate which of the four it most closely resembles.


2 Describe the nature of ‘price competition’ in the market for Current Accounts, and evaluate its effect on the degree of competition.


3 Identify and analyse the significance of the ‘barriers to entry’ to the UK retail Banking market.