The real reason people don’t change banks

Interesting conversation about switching accounts. I’ve had a few people saying that banks don’t have loyal customers, but they have trapped customers. By way of example, an email from a friend:

I am just exactly as loyal to my bank as they are to me, which is to say not even slightly. I swear to God, if my own experience is anything to go on, I would bet that low churn reflects not so much customer loyalty as customer inertia, and even the word "inertia" doesn't fully capture it. It's really more like a dread and fear that unwinding the relationship creates complexity that just feels overwhelming.

It’s like upgrading your laptop in the old days before cloud computing came along. Back then, you back everything up from the old laptop, configure the new one, upload all your stuff from the back-up, and only give up the old one when you’re happy everything works. How often did you upgrade when you had to re-key every single contact person, diary entry, re-download every app and podcast, etc?

The same is the situation when switching banks.

If I were to switch, I would have to manually write down all the account details of all the folks I pay money to regularly, or even irregularly, and then re-enter them all to the new account. That would take ages and if I mis-keyed one digit then all would fail. And it's not just the regular bill payment details but it's all the in-bound side, which is a nightmare for me as a small business. My business bank account is what is entered into SAP/Ariba (speaking of business models that really owe more to hostage-taking than to customer service) which links into the all of the systems of my clients. If I changed that bank account, how do I get all my client systems updated?

Why can't there be a way that an account number at one bank automatically forwards any incoming funds to the new one at the new bank, at least for some reasonable period of time, just as your old work account can automatically forward emails to your personal mail for a while?

The bank that could take away the pain of switching away from the customer and do it all for them, would be the one that everyone would switch to. I'd bet money on it.

Aha! Is this the secret to why so few people switch accounts?

It’s interesting as this came up again in the podcast Money Never Sleeps with Pete Townsend (not the guy from The Who). Pete and Paul Smyth (a coach and recruitment specialist) were debating my blog about Anne Boden’s presentation (founder of Starling Bank). The presentation focused upon seven myths in banking that I claimed were still true, and included the myth that people don’t change bank accounts:

People are switching to Starling, Monzo, Revolut, TransferWise and others for financial service, but are they actually switching accounts? Anne claims they are. When looking at account switching data, the service offered by BACS for easy change of bank account, the numbers are rising year-on-year, but the top three banks making gains are Nationwide, HSBC and NatWest. So yes, people are moving accounts between traditional banks and yes, yes, yes, Monzo and Starling drop in at fourth and fifth places respectively, but the numbers are still low generally. Most people don’t change their bank account. Sure, 919,000 did last year … but that is a lot less than the 50 million who didn’t.

Pete and Paul talked about this and said words to the effect of (12m20s into the podcast):

I can’t wait to change my bank account. I’ve been with one Irish bank for a very long time and looking at the entry of new players coming into Ireland and making a decision as to which one I will move over to. The reason is that my business account reflects my business life and my personal accounts reflect my personal life, and I just want some level of cohesion there. But it’s hard to change a bank account. I’m looking at the list of regular payments in my personal account and trying to work out how to set those up in a new account. It’s hard to do that. I tried to do that with just one – a monthly car insurance payment – and couldn’t do it as the company said they could only take IBANs (bank identifiers) that begin with IE (for Ireland). They wouldn’t let me switch to use my N26 account because it begins with DE (for Germany).

In other words, like my American friend, if you try to change your main bank account then you have to take the responsibility for doing it. You have to be the person writing down all the account numbers and identifiers of all the people you have regular payments with. You then have to manually enter those details in the new account which, if it is not registered on domestic terrain, even with SEPA and passporting, will be very difficult. You are also going to be responsible if any of those account details are wrong and you pay the wrong person, bearing in mind that most banks will make a payment to an account without checking the account name, as that is not possible within their legacy systems structures.

Jeez. No wonder people don’t move. No wonder they leave their accounts festering in the old world and, if they move to the new world, they only move their lifestyle spending. Not their boring old bill payments.

Here’s the catch though. Regulators are sniffing this one. Regulators have realised there’s a bad smell here. Regulators are waking up and saying if you have trapped customers, we will release them.

Note, for example, my mention of the UK account switching service. What is it? A regulation introduced in September 2013. The BACS website described it well enough:

The full switch service, known as the Current Account Switch Service, applies where the customer wants a hassle-free service that automatically transfers all payment arrangements to their new account and closes their existing account. It guarantees that all payments associated with the customer’s old account will be switched to the new account and ready for use with effect from a pre-agreed switch date. Any payments that continue to be made to or collected from the old account will be automatically redirected to the customer’s new account. Redirection will be indefinite for those customers who continue to require it.

Exactly what my American and Irish friends were wishing for.

When the switching service was introduced, it promised to make it hassle-free but the one thing it didn’t do is provide account number portability. This was a wish that some had. The wish was that if I changed provider, I could keep my old account number in the same way as when I change my mobile phone provider, I can keep my old phone number.

Now, for those of us who know this market well, that would be a hard thing for any bank to do as it would mean completely changing core systems. However, it wouldn’t be hard if we were working in modern cloud API structures. It’s more to do with banks’ core systems being hard wired to operate with specific numbers in specific code developed in the 1970s or earlier.

Interestingly, the Financial Conduct Authority (FCA) did a review of this question two years after account switching was implemented. Section 8 of their report offers ideas of a solution to the issue of account portability but makes no firm recommendations. It is not necessarily a big requirement however, as 65% of retail customers and 60% of business customers claim it would not make them more likely to switch, according to the FCA’s research. Nevertheless, this issue crops up regularly – just do a search for ‘account number portability’, better known as ANP – and you will see, but the industry is loathe to follow this route due to the cost overhead.

All in all, it is intriguing how switching your bank provider is a big issue. No wonder most people stay with their bank for twice as long as their lover and, even when they can change bank in a hassle-free way, they don’t. I say this as, since the 2013 launch of account switching in the UK which makes this easy, there’s only around one million people changing bank provider each year. That’s about two percent of the total number of accounts out there. In other words, 98% of bank customers don’t bother switching … even when they can and it’s easy, simple and hassle-free. Ah well, that really is a truism and not a myth.