Changing Banks
10 Lessons from 5 and a half years of bank switching data
Back in September 2018, the obscure payments processor formerly known as the Bankers Automated Clearing Service threw a party. Describing it as a “magical event” for a “very special evening”, guests were serenaded with the platitudes and policy discussions expected at such events, as well as — bizarrely — the energetic exhortations of a professional street magician.
Whether attendees were wowed or simply confused by this combination is unclear. What is certain, however, is that attendees of the Fifth Anniversary of the Current Account Switching Service had to wait a little longer for BACS to pull the five-year figures from out of its top hat.
Nine months on and with last week’s release taking us to 5 and a half years of switching data, now seems a good time to reflect on this much-heralded yet rarely examined major reform to the UK banking market.
1. Big bucks but no big bang
The “Switch Service” was launched in 2013 and cost the best part of a billion pounds, including £750m setting up the service that was followed by several multi-million pound advertising campaigns in most years since.
Yet despite this massive outlay, switching figures haven’t exactly been spectacular. Hitting more than a million switchers in its first 3 years, the service has struggled since, and with a declining trendline over the full period.
Whilst these rates of switching are likely higher than they were before the service was introduced, it’s difficult not to draw the conclusion that the switch service has been something of an expensive flop — or at least that a billion pounds could have been better spent.
Groups such as the New Economics Foundation, Which? and Move Your Money warned that efforts to increase switching were unlikely to have a huge impact, arguing that the issue was not the friction in switching, but the lack of genuine alternatives to switch to. Those criticisms seem to have born out, with low switching figures belying the CMA’s narrow view of what constitutes “competition”, and how effective a lever it is for stimulating change in the banking market.
2. We now know a lot more about why people change banks
This does not mean that the Switch Service has been a complete failure, however. One positive but unintended consequence of the scheme’s poor performance has been that BACS has had to spend a lot of time and effort figuring out why it hasn’t worked.
This has produced a raft of excellent research that explores the behavioural, psychological, and social factors that encourage or inhibit engagement with the current account market, as well as the reasons why people do or do not act on that engagement.
The myth that people are utility-maximising automatons seeking out the highest value in a neutral and competitive market has been debunked. Instead, the critical role of risk aversion, inertia, and the importance of a trusted recommendation has finally been given the recognition they deserve.
In addition, the research emphasises again and again the critical importance of the values of a bank and whether or not they align with their customers’. Where the two are out of alignment, switching is far more likely. This augurs well for values-based and purpose-driven banks, and should serve as a warning to those still mired in controversy.
3. Switching stats are only half the story
Before diving into the detail, it’s important to note the key caveat to this analysis is that switching only accounts for around half of peoples’ moves between banks.
According to the FCA’s seminal Financial Lives survey, 44% of new account openings were actioned through switching, whilst 38% were done manually by the customer, with some closing their old account, and others leaving it open. The remaining 18% of account openings were with the person’s existing account provider, meaning that these customers were not changing banks.
It’s reasonable to assume that there will be some differences between the behaviour of switchers and manual movers, because of the finality of the Switch Service and the trust required to place faith in an automated system. Despite these caveats, switching may only account for half of all moves between banks, but it is the only half around which we have any public data. It is, therefore, the only half that we can analyse, and the only half we can actually learn from.
4. Winners and losers
Looking at the numbers themselves, and it’s clear that there have been some major winners and losers:
The big winners are Nationwide, gaining just over half a million customers (net) over 5 and a half years. That’s more than a full Wembley-stadium worth of additional customers a year, every year, for half a decade. Not bad for the world’s biggest building society.
On the other end of the scale sits Barclays, Britain’s most switched-from bank, NatWest, and Lloyds — three of the biggest brands on Britain’s high street. Whilst it might not be surprising that the banks with the highest market shares lost the most customers, it does demonstrate the ability for smaller and newer competitors to eat away at their lead. This trend looks likely to continue.
5. The bigger they are the harder they fall
The figures look even more stark when taken on the banking group level. three of the Big 4 banking groups, which dominate around 70% of the personal current account market, made net losses.
Only Lloyd’s Banking Group made notable gains, and that was as a result of its successful Halifax brand. Stripping out Halifax, Lloyds Banking Group made losses of 269,090 net customers between its Lloyds Bank and Bank of Scotland brands. Meanwhile, NatWest owner RBS lost 516,075 net customers across its three brands (RBS, NatWest, and Ulster Bank). How many more customers can RBS afford to lose?
One interesting point here is how much of a firewall the subsidiary structure can be. Lloyd’s Bank has been mired in the PPI controversy and consistently made customer losses over the period, but its subsidiary Halifax has been completely insulated from these woes. This demonstrates how a smaller brand’s reputation is largely independent of its parent bank brand–which is doubly damning for NatWest, given it’s heavy customer losses (with recent minor gains notwithstanding).
6. Consumers are Reacting to Controversy
One easy conclusion to draw from the winners and losers is that the ongoing slew of banking scandals seem to be having a genuine and ongoing impact on reputation and customer numbers. From PPI, Libor, bankers bonuses and bail-outs, the biggest losers have all attracted attention for all the wrong reasons.
And it’s not consigned to the three worst performers either — The Co-operative Bank has been beset by issues, from a drug-addled CEO and almost going bust, through to being taken over by an American “vulture fund” and ongoing IT issues. Unsurprisingly, it’s numbers are poor, losing 176,689 customers, making it the fifth-worst performing bank brand (after the bottom three and RBS).
By contrast, the biggest winners have all largely been free from scandal, with Nationwide, Santander and Halifax all remaining unscathed from the controversies that have marred the industry. This suggests that “conduct risk” and scandalous controversy are not only a moral issue, they are demonstrably a commercial issue as well. Bruised behemoths with more skeletons in their cupboards should take note.
7. Switching rewards matter for some customers
As well as scandal, people are reacting to sweeteners. Both Halifax and Nationwide have consistently offered large financial incentives for people to switch to them, and these offers seem to have tempted large groups of customers to move.
The caveat to a switching reward though is that once it’s removed, the effect wears off. This perhaps explains why Halifax seems to have lost its lustre, having been the most switched to bank up until the end of 2018, when it fell to third.
Santander has never offered a significant switching reward, and instead actually charges customers for use of its 123 Account. However the bank still offers a financial incentive, with the 123 Account coming with cashback, retailer rewards, and interest on current account balances.
In addition, Santander has conducted a long-running and high profile celebrity marketing campaign, as well as winning multiple awards for its 123 Account. Similarly, Nationwide have been keen to play up their credentials as a mutual organisation, emphasising the role this plays in being aligned to their customers' needs and promising to keep open its bank branches. This suggests that whilst financial rewards are appealing, unique features can also pull in customers — and the sweet spot is to have both.
8. Changing fortunes
Until recently, a bank was either a “switched-to” bank or a “switched-from” bank — meaning that whether it was a winner or a loser, a bank rarely reversed its fortunes.
This seems to have changed. Between mid-2013 to mid-2016, HSBC saw only one quarter of net growth in customer numbers, and lost -114,756 customers overall in that period. However since then its fortunes have completely reversed, with the bank seeing only one quarter of customer losses, and gaining 137,451 net customers between late 2016 to the beginning of 2019. Around the same time, Santander also seems to have suffered a reversal in fortunes, with the bank slipping into negative customer losses for every quarter but one since the end of 2016.
Halifax meanwhile was consistently the most switched-to bank, gaining an average of more than 35,000 customers every quarter up until early 2016, and suffering only one quarter of customer losses right up until Q1 2018. Again this seems to have changed, with the bank making net losses in the last three quarters, including being the biggest loser in last week’s dataset, losing 5,248 more customers than TSB (which has been absolutely hemorrhaging customers since its massive IT meltdown in June last year).
What is it that has seen these dramatic reversals of fortune? Whilst Halifax’s removal of its generous switching rewards seems key, it’s less clear what has changed at HSBC or Santander. Are these indicative of long-term trends, or merely just blips? Bank brands and competitors looking to gain customers through switching could do well to look closely at these three case studies.
It’s also interesting to look at the three switching winners — Nationwide, Santander, and Halifax. Only Nationwide is on an upward trend, whilst Halifax and Santander’s lofty positions seem to be riding off early successes with the Switch Service, rather than through ongoing gains from switching.
9. Digital disruptors are now established challengers
Another key lesson is that new entrants have performed consistently well, with Monzo, Starling, and Triodos all recording positive net customer switches for every quarter since each joined the service.
Monzo is the clear winner of the newbies, and after acquiring 21,310 customers net in only one year, the digital disruptor has overtaken established challengers like Tesco bank (with a net gain of 12,493 over a much longer 4 and three-quarter year period), Co-op, TSB, and Metro Bank. The digital disruptors are here to stay.
10. Innovation is the name of the game
Whilst its customer service and community building have also been critical, what has undoubtedly driven Monzo’s success is its innovative and engaging banking app, which gave significant impetus to the new wave of digital-only and digital-first challengers, and also gained a key first-mover advantage in the personal retail banking space.
For anyone who has read the BACS research, this will come as little surprise. Writing in November 2016, the group presaged Monzo’s success by arguing that innovation will drive customer switching in the current account market:
It seems unlikely that ongoing innovation in the current account market will come from seamless UX and beautiful and intuitive UI. Instead, a great digital experience is now a minimum expectation for many, especially amongst younger and digital native demographics, and this will increasingly become a hygiene factor for any aspiring lender. With the market now increasingly saturated with digital-first banking apps and the first-mover advantage well and truly captured, the next switch-driving innovation will have to come from somewhere else.
Instead of ever-snappier apps and online portals, the next innovation in banking is likely to be something altogether different, and perhaps more structural: new forms of ownership and governance structures, which can radically alter a banks incentives, pressures, and purpose. There is currently a swathe of new banks being built to look, feel, and act radically different from both the big-bank incumbents and the shiny new app-driven digital banks. Could they be the next big switching winners, attracting customers keen for a more personal, grounded, and values-driven approach?
More than 10 years after the crash and 5 since the Switch Service that followed it, the structure of the UK banking market looks much the same, with 4 mega-banks dominating the market and a raft of smaller players battling to get a look in. What may well have changed, though, is the underlying dynamics of that market, and the ability for new players to chip away at the incumbents’ lead. Only time will tell if this turns out to be a magic fix, or merely just a temporary illusion. Meanwhile, the Bankers Automated Clearing Service will have to keep the champagne on ice.
