08 October 2015
The case for centralised consumer switching
The UK Government is committed to boosting competition and improving consumer choice across a range of industries. Enabling consumers to make good, well informed choices and to act on them is high on the agenda. In banking, a series of regulatory reviews found that barriers to customer switching were weakening competition. Industry-level action was necessary to remove these. Now centralised switching systems allow customers to switch banks easily and with certainty. Other industries can learn from this experience.
Several banking reviews highlighted barriers to switching as an impediment to fair competition. The banking industry addressed these criticisms with two centralised solutions: the cash ISA switching system, launched in 2012, and the Current Account Switch Service (CASS), launched in 2013. Both of these services have proved very popular with customers, particularly CASS, which enables consumers to switch banks within seven days and with certainty. Over 2 million people have used the system, so CASS marks a triumph for consumer choice and sovereignty. Both centralised switching services are owned and managed by Bacs on behalf of the UK payments industry, and operated by VocaLink.
Regulators in the energy, pensions and communications industries are currently consulting on the issues and potential solutions around customer switching. However, there are multiple solutions to the challenge of empowering consumer portability and argument is easily generated. Switching solutions fall broadly into three categories: open, bilateral and centralised. Each has advantages and drawbacks.
An open system. Typically offers rules and procedures that allow participants to connect using agreed formats but avoids prescriptive methods or channels. Participants are free to choose their own methods that may include paper, electronic or other bilateral communications. An open system gives participants maximum flexibility but makes it difficult to enforce common customer service principles.
A bilateral system. Similar to an open system - allows participants to connect with each other using shared procedures and rules but without a central platform. A bilateral system suits industry groups with a small number of major players. It also enables low-cost communications, but has the same problem as open systems.
A single central platform. Participants connect to a common system, which switches messages based on standard scheme rules, security and message formats. This is how the UK payments systems operate.
Any successful system must offer quick, reliable, and efficient customer switching. Consumers must be able to compare the services on offer and if they decide to switch they must be confident that the transition will be error free and on time. The existence of multiple, different or unclear processes for switching can cause confusion. Customers need to be assured of service continuity and must be kept fully informed about what is happening and when. Delays or lack of information, ‘what’s happening to my switch’ will quickly erode consumer confidence.
With the CASS service, once a bank customer decides to switch to a new bank, the gaining bank is responsible for all future communication. As that bank is acquiring a new customer, it has the incentive to ensure that the switching process works well. The customer also benefits from a single point of contact, which removes friction, stress and confusion. CASS then automatically redirects transactions to the new account, ensuring the customer is never inconvenienced.
To achieve a smooth switch, a solution must offer standard data quality and security standards. All market participants must agree these at the outset, so a degree of cooperation is necessary to ensure that standards are adequate to fulfil all the requirements for a seamless customer switch.
The UK banking industry experience suggests that a single, central system may offer practical advantages over alternatives:
Availability. It potentially offers a higher level of availability, which allows participants to access the system and not have to take into account specific bilateral nuances or intricacies.
Compliance and control. It is easier to monitor and control and promotes transparency across the industry. Consumer confidence is improved and it is easier to offer a consistent service level. In the case of CASS, service quality is guaranteed, which de-risks switching and encourages use.
Data quality and security standards. A seamless solution must adopt standard data quality and security standards, which is preferred by regulators and clearer for consumers.
Resilience. Any switching system must be resilient and reliable to instil user confidence. The Bacs system achieves this and consistently offers 99.99% availability.
Equality of access. All service providers must enjoy standard connectivity and data formats. A centralised system offers a ‘level playing field’ and can provide universal access more easily than any alternative.
Each of the above considerations is of great relevance in an industry that is complex and has many players. Consumers need a switching process that is free, easy to use, secure and trustworthy. A centralised system removes or mitigates many of the risks that consumers are exposed to with an open or bilateral system. So what are the drawbacks?
The development of a successful centralised solution in any industry requires close collaboration by all participants to agree standards, processes and procedures for switching. Based on the banking industry experience, it also may require an industry association to broker these across competitors, and an experienced technology provider like VocaLink to implement the solution. It may seem ironic that the road to competition needs to be paved with increased cooperation. But service providers should compete on the strength of their individual service offerings rather than their entrenched market position. And they should be prepared to collaborate to facilitate easier switching.
To discuss further, please contact Josh Berle, Account Manager – Government Services on +44 (0)203 818 4813 or email firstname.lastname@example.org