Outdated payments practices inhibit reform

One insight gained from submissions to the Senate inquiry into banks from the insistent tone of the banks and their associations is their view that doing anything constructive to foster account-switching is impractical.

A common theme in the submissions is that switching is abundant already.

The Australian Payments Clearing Association said there were 4.43 million new accounts opened in the year to September 2010. Bank customers also closed 2.7 million accounts over the year.

Leaving out organic growth (from new households and businesses), APCA suggests the churn rate is 3.5 million accounts each year, or 10 per cent of the account base.

Westpac puts the churn rate at eight per cent and wrote that data "relating to the opening and closure of transaction accounts demonstrates that customers have not been finding it difficult to switch their accounts."

Commonwealth Bank wrote that "there is a perception that few customers switch banks.

"The reality, at least from the group's experience, is different: a significant number of customers do switch."

CBA said it "opens and closes over one million personal transaction accounts a year" out of an account list of five million.

"We open slightly more new accounts a year than we close," CBA said.

One rationale for steering banks towards easier methods of switching is to foster even higher rates of churn, perhaps through account number portability and standardisation of product terms and bank data practices.

The Consumer Action Law Centre set out arguments along these lines in its Senate submission, reported yesterday.

Banks are insistent that interventionist measures around account numbers and switching are impractical and expensive.

Westpac wrote that "while the comparison with mobile number portability seems logical, there are reasons why its implementation in banking is impractical."

The bank pointed out that someone's telephone number was his or her "external" form of an account number. The actual account number - the one that mattered to the telephone company - was the "internal" number, and this was, in fact, unique and not portable.

"A similar external representation does not exist in banking," Westpac wrote.

"The account number serves as both the internal and external representation of a customer's account and arrangements with the bank."

CBA agreed, writing of portability: "This is not possible under the current banking system infrastructure."

The bank said that "changes to make account numbers portable would be extremely costly for business, government agencies and banks."

CBA said the costs involve adapting the account numbering system and would affect 250,000 customers, mostly employers, which use the direct credit system, as well as 20,000 users of the direct debit system.

The Australian Payments Clearing Association used firm language to make the same point.

"It would be a mistake to equate the account number with a mobile phone number, as some commentators have done," APCA wrote.

"Even if account numbers were fully portable amongst providers, this would not improve addressing arrangements for most payments," APCA said.

"Separate, additional arrangements would need to be made for other identifiers, particularly card account numbers."

APCA provided data on the use of "identifiers" in making third-party payments.

Bank account numbers are used for direct entry payments, which comprise 33 per cent of non-cash retail payments.

Nearly two-thirds of non-cash retail payments do not use the account number for addressing purposes, APCA said.

Instead, they often use 15- or 16-digit credit card numbers. These are increasingly the basis of numbering for debit accounts as well as "scheme debit" elbows Eftpos aside. APCA said 58 per cent of "identifiers" were credit card numbers.

BPay reference numbers comprised four per cent of volume.

The Council of Small Business Organisations provided some colour to the debates.

Writing of its own efforts to have merchants credited with Saturday sales on Saturday night and Sunday sales on Sunday night, the COSBOA quoted a recent letter from the Australian Bankers Association.

"The technology of the banks is outdated and cannot manage the process," the ABA wrote.