COMPETITION AND BANKING SERVICES IN THE UK: A PROGRESS NOTE
This note describes the changes to the banking review that are being made in the light of responses to the 25 January consultation document, and other evidence collected by the Review.
Internal links
Changes to scope of the review
3. There will be no major changes to the overall scope of the review, but it will be widened to take account of the development of e-commerce and specifically how different modes of transaction, including e-money, may best promote effective competition, particularly in the money transmission services market.
4. The Review will also need to pay greater attention to the detailed effect of current and proposed legislation, and other government initiatives, on competition in banking services.
5. In addition, there will also be more focus on the complex interaction between prudential regulation and competition.
Money transmission
6. The definition of markets in the various money transmission systems is complex. The Review will treat both cash and high value, real time gross settlement (RTGS), interbank transactions as being in different markets from the generality of low value non cash transactions. Beyond that, any conclusions emerging will be tested against both narrow (eg credit and debit cards in different markets) and broad definitions (eg cheques, credit and debit cards all in the same market).
7. The Review will pay particular attention to the role of merchant acquiring in enabling competitive markets to function.
8. The Review will consider the degree of competition at level of the relevant geographic market for credit and debit card networks, including outside the UK where appropriate.
Credit for SMEs
9. Notwithstanding the majority view of respondents to the consultation document that there is no problem in SME credit markets, the Review will continue to have a focus on this issue.
10. The question of whether there are separate debt and equity credit markets will be addressed quantitatively. The Review will consider the impact of a conclusion either way on potential recommendations.
11. The evidence continues to suggest that this market is local, and will continue to be so for the foreseeable future, despite technological advance. Moreover in some parts of the UK the number of suppliers may be very limited. The Review will take a particular interest in these.
12. The Review will place more emphasis on the totality of UK Government intervention on the economic health of those sectors of the economy where medium sized, high potential companies are the source of growth and innovation.
13. It will also consider the barriers - institutional or regulatory - which prevent easy exit routes for those supplying equity for start up businesses through public offerings, as happens widely in the United States.
International comparisons
14. The Review will add Canada and Australia to the list of comparator countries for most of its areas of investigation. However, there is less expectation that international comparisons of competition in the SME credit market will be a major factor in driving the conclusions and recommendations.
Consumer issues
15. The Review will now investigate a number of issues affecting personal retail customers.
Next steps
16. The Review has now embarked on an intensive information collection and analysis stage. Aside from the increased focus on regulation and Government intervention outlined above, the data collection will be focussed around a series of projects:
a. a competition analysis. The core of this analysis is a study into the profits made by financial providers in the relevant economic markets. This will investigate the extent to which returns to banking services as a whole, and in specific economic markets, are consistent with a competitive outcome. The study will as far as possible take account of the economic cycle by examining longitudinal data.
The Review is also looking closely at side data on the prices of financial products, and price variations by type of customer or geographic location; switching costs and bundling or tying of services.
The prices of a range of products in the UK will also be compared with those in other countries.
b. consumer issues. The Review is undertaking an analysis intended to shed light on a number of issues of concern to consumers including "incomplete contracting" (or the different expectations of consumer and suppliers about their respective future behaviour at the time when a deal is made); transparency of charges; and redress.
c. money transmission. The Review is seeking data on a range of issues including the cost structure of the various money transmission systems, the prices charged to those wishing to use them and the use made of them by different market participants.
d. E-commerce, e-money. The work on money transmission also feeds into the Review's work on e-commerce and e-money. Studies and analysis will be undertaken to establish the best ways to introduce, and maintain, competition in the supply of financial services to underpin both e-commerce and e-money, and to establish if, and how, such new services can best provide competition to existing money transmission services.
e. SME credit. The Review is undertaking studies which will test its central view that the market for SME credit is local. These include an analysis of the location of SME customers in relation to their credit suppliers, and surveys to test the importance to SMEs of relationship banking. The surveys will also determine the extent to which lack of access to the right credit products, "incomplete contracting", bundling of products and switching costs are a problem.
The Review will also consider whether there is a "missing product" in this market - a high risk/high reward credit vehicle - and, if so, what conditions - legal or institutional - would be necessary to enable it to be provided. This will include an analysis of any legal or institutional barriers that unnecessarily impede the availability of equity to small companies wishing to expand.
This work programme is expected to be substantially complete by mid July.