Wednesday, May 08, 2013

The proposed EU-directive on Bank Accounts: wrong tool

Today, the European Commission will announce a proposal for a Directive on Bank Accounts that covers the following areas:
- comparability of bank account fees: the aim is to make it easier for consumers to compare the fees charged for bank accounts by banks and other payment service providers in the EU;
- bank account switching: the purpose is to establish a simple and quick procedure for consumers who wish to change from their current bank account to a different one, with the same or a different bank or other financial institution;
- universal access to bank accounts: the aim is to allow all EU consumers, irrespective of their country of residence or financial situation, to open a payment account, which allows them to perform essential operations.
With the proposal the Commission continues its standard policy towards the financial sector: ride the road of regulation as long as the sector is still unpopular with the public. It has done so with regulation 2560 (on fees) which had to motivate banks to speed up intercountry payment processing in Europe and it has in a similar vein used the regulatory process for the Payment Services Directive. Repeatedly we see the banking sector respond with initiatives to improve operations and just as repeatedly we see the European Commission and Parliament find that this was not sufficient and move forward with regulation.
At face value, the goals of the Commission with this Directive seem laudable. But what would interest me most is the degree with which the Commission has done its regulatory homework. Quite some time ago, there were EU-initiaves and rules on 'better regulation', which meant that a solid cost-benefit analysis would be required by the Commission before proceeding with further regulation. In the process of discussing switching cost, the Commission did not follow these rules however (see blog).

I remember that at the time I was amazed by the ease with which the Commission bypassed the work done by an EU expert group on user mobility in bank accounts (of which I was a member). The consequence was that, without having proper data as to the degree of problems experienced, the nature of the problems in different countries, the discussion remained a yes/no discussion. So I was quite interested to see if in the mean time there is more hard evidence on the table to determine the nature of the problem that needs to be solved (and to see if it is a European or a national problem).

A quick look at the impact assessment tells me that not much has changed. It is essentially a fast forward reasoning towards the norm that unless everyone in Europe switches bank accounts quite a lot, the market is evidently failing and thus regulation is necessary. Furthermore there is a blind eye as to the different types of service providers: the document assumes all players to be banks with a full service package. In terms of analysis, it is skewed as it misses one alternative explanation for low bank switching rates. That explanation could be that, from a consumer budget point of view, it is more economical and rational to use the scarce time to chip off a small percentage of other purchases (mortgage or lending percentages, tablet-purchases or mobile phone subscriptions) than to spend a lot of time comparing and switching banks and earning very little revenue in the process (see also the presentation here that discusses which assumptions lead to which regulatory preference).

Seeing the current state of discussions (a directive proposal) it seems hard to imagine that the plan would be withdrawn or modified seriously. Still, it would be useful if the Commission had done their homework a bit better and at least had chosen a proper regulatory tool. If indeed the provision of bank accounts accross the EU is a concern, why not choose Universal Services Obligation as the regulatory mechanisms, that is most suited?

We used this mechanism before in Europe, to designate the amount of public telephone's that had to be available to the public. And setting it up for banking isn't hard to do (read this Tilburg University Report) but it does require one thing: a better cost/benefit analysis:
Furthermore, designating all banks to take care of the product dimension of a Universal Services Obligation (e.g., consisting of only a basic bank account service) may be the most effective way of implementing it, provided that the USO has a minimal scope. However, with regard to the geographical dimension of a USO, designating all banks leads to unnecessary cost duplication, so that it is worthwhile to consider other options, such as self-regulation and a franchising mechanism in combination with an auction. In addition, technological developments in a sector are very relevant when assessing the need or desirability of universal service obligations. By interfering in these processes without having made it clear in advance that there is a problem, such developments may be distorted; hence the importance of carrying out a cost-benefit analysis as a starting point.

I think the citizens of Europe are best off with goverments that only regulate when the facts are evident and the tools of regulation are properly geared to the problem at hand. At this point in time, with this Bank Account Directive, I believe we are heading for another emotion-based, cost-increasing all-in Eu-wide regulation, which underlying problems (if any) could have been solved much cheaper and easier by using other more appropriate regulatory tools.

PS. The post is updated at 1823 to include some of the impact assessment data.