Why the “move your money” movement still has miles to go

Remember back in the day when  you couldn’t switch to a new mobile phone network without changing your phone number, as well? This was a major inconvenience for customers, and surely caused millions of unhappy ones to stay put. Much to the delight of their current service provider, of course.

In 2003 Americans finally got the right to switch cell phone providers without losing their phone numbers. Although the cell phone carriers and their trade associations fought hard to keep this from happening, the courts ultimately sided with the FCC, which had backed the move. From then on wireless carriers had to work harder to keep their customers satisfied or risk losing them to a competitor.

Some consumer advocates now think that this is exactly what needs to happen in banking. They say that, today, the hassle of transferring direct credit transactions (like paycheck deposits) and direct debit transactions (like mortgages and credit card payments) is what forces unhappy bank customers to stay put. This would be solved if they could switch banks without having to close their existing account, with the help of account numbers that are portable and easily transferred from one institution to another. Banks would then have more reason to treat their customers fairly and to offer more competitive pricing and better service overall.

The debate on bank account number portability has been heating up outside of the United States. In the UK the Independent Commission on Banking, established to consider systematic reform in the wake of the financial crisis, has looked at the issue. While it has held off of a full move to portability for now, it has introduced other reforms that many see as a move in this general direction. The same goes for Australia. India has identified account portability as a distant goal and is now putting in place some of the standardized processes that would eventually be needed to achieve it.

On the other hand, Sweden might already be halfway there. It has “Giro” numbers, which are unique codes given to each customer and used for receiving and disbursing direct credits and debits. The Giro number is linked to the bank account number. While the bank account numbers are not portable, the Giro numbers are. Customers can de-couple them and move them from bank to bank.

So what would it take to have true bank account number portability in the United States? To oversimplify, some of the essential elements include:

• a standard account number format used across all financial institutions
• a centralized database for all of the account numbers to which all financial institutions are plugged in
• a central clearinghouse with up-to-the-minute information, which can route all payments to their correct destinations

As you can imagine, the costs associated with putting all of this in place are significant. The Australian government estimated these costs in a report it commissioned last year to look at options for greater account transferability. Here’s what the report said:

The Netherlands examined the feasibility of full account portability in the late 1990s but it was not pursued because of the prohibitive costs involved. The cost of implementing such arrangements was estimated at between €300 and €500 million for banks alone — about $A400-700 million at today’s exchange rates. This decision should be seen in the context of a country already in possession of an important part of the necessary infrastructure, namely a centralised payments clearing house, which the Netherlands has had in place since 1967. 

As you can also imagine, banks and their trade associations are only too happy to highlight these kind of costs as reason to delay a move towards account portability. Therefore it might be decades before unhappy bank customers have the freedom to and true ease of movement to take their business elsewhere.

Tags: bank accounts, portability, reforms, tranferability

Category: Banking