The humble current account has long played a supporting role to the more glamorous and lucrative stars of the banking world, but it is now moving on to the centre stage. Developments in regulation and technology have increased the profile of the current account within the payments industry, but while banks are currently directing proceedings, there are other players waiting in the wings who can equally provide a basic transaction account.
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Most transactions go in and out of the current account, which makes it the stickiest of products for the banking industry and forms the main relationship a bank has with its customers. In developed markets – particularly in North America and Europe – cards have been a key instrument of current accounts for retail payments, but now that business model is undergoing major changes.
“The cards business is coming under threat,” says Zilvinas Bareisis, a senior analyst at financial consultancy Celent. He points to the recent rulings in Europe and the US on interchange fees, which are paid by a merchant – via their acquiring bank – to issuing banks every time a consumer spends on their card. In July, the European Commission (EC) proposed new rules to cap interchange fees on credit and debit cards in order to “finally put an end to the unjustified high level of these fees”, according to Michel Barnier, the EC’s internal market and services commissioner. In the same month, a US court ruled that the cap on debit interchange set by the Federal Reserve was too high.
With interchange revenue under threat, cards are no longer a cash cow for issuing banks. In the past, says Mr Bareisis, banks may have been reluctant to pursue payment innovation that may have cannibalised their cards business. That is now set to change.
Aside from regulation, the traditional model of the current account is also being challenged by disruptive innovation in online and mobile payments, and banks need to consider how they will respond. “Banks can always add more bells and whistles and fancy ways to present information. The big question is, can you make the current account more transactional than it already is?” says Mr Bareisis.
E-commerce explosion
E-commerce is one area that has witnessed an explosion in payments, but one thing that has held it back is that consumers have been unwilling to share their bank details to shop online. Now solutions that overcome this hurdle by connecting the consumer’s current account directly with the merchant’s are coming to the fore.
In Canada, the electronic payments network Interac was one of the first to do this. In 2005, it launched Interac Online, which lets shoppers pay online from their own bank account. At the checkout stage, the shopper clicks on the Interac button and then selects their bank from the list. This takes them to their regular online banking platform where they can make the payment directly from their current account to the merchant’s account.
Lorna Johnson, senior vice-president of products, services and innovation at Interac Association, says this solution was built as an alternative to traditional card-based online payments. One advantage, she explains, is that the consumer does not need to provide card or account data to the online merchant. “The unique design of Interac Online makes it an extremely secure electronic payment method for financial institution customers and also carries a low fraud loss ratio for financial institutions. Merchants equally benefit from the strong security, as well as low fees and no charge-backs,” she says.
The Netherlands has a similar solution in the form of iDeal. February 2013 figures from Currence, which owns the iDeal brand and product, show that 55% of online shoppers in the Netherlands prefer to use iDeal, whereas only 5% choose PayPal. Although it has been successful in connecting the current accounts of consumers and merchants in the Netherlands, iDeal has not yet expanded into other European markets.
Connecting Europe
Now, however, banks are able to sign up to a pan-European scheme that enables e-commerce payments directly between bank accounts. In March, EBA Clearing, the provider of pan-European payment infrastructure, launched MyBank, which allows consumers to shop online from their online banking platform.
Aside from the EC’s clampdown on interchange fees and desire to build a pan-European debit network, there is also a drive to make bank accounts more accessible so that everyone can participate in the economy. John Broxis, director at EBA Clearing, points to the wider picture of the EU’s digital strategy, which includes the goal of financial inclusion so that everyone can have access to basic payments services and pay online. “MyBank is at the heart of that initiative,” he says.
In May 2013, the EC published a directive on the transparency and comparability of payment account fees, payment account switching and access to a basic bank account. The EC defines a ‘basic bank account’ as one with the ability to make and receive electronic payments and make withdrawals, without an overdraft facility. Mr Bareisis notes that it is not only banks that can provide this service. “Non-banks are entering this space and we will see that even more,” he says.
Going mobile
The development of the prepaid industry has witnessed a proliferation of solutions that combine a prepaid account with mobile technology. Funds can be deposited into the account and transactions can be made with a prepaid card or a mobile device, and the solution can perform the same transactions as a current account.
The US, which has a sizable underbanked population, has a developed prepaid market and many players have entered this space to provide an alternative to current accounts. One example is Bluebird, provided by Walmart and American Express, which was launched in October 2012. Users can have their salaries paid into the account, load funds from another account and make payments through the online platform or a mobile app. Bluebird is pitched as an alternative to the checking account – as current accounts are known in the US – with no minimum balance or monthly fees. The charging structure means that customers instead pay $2 to withdraw cash at an ATM and an order of Bluebird cheques costs $26. To users, Bluebird functions in the same way as a basic current account.
In Europe, it has been possible for non-bank challengers to provide basic transaction services without a banking licence and be regulated as ‘payment institutions’. One such example is CashFlows, which was established as a payment institution in 2009. It aims to consolidate the number of accounts and simplify the financial supply chain for small businesses. Rather than having a number of accounts at a bank – including one to accept card payments into the merchant account – CashFlows allows companies to have all the transactions flow from a single account, which also simplifies the fees they pay and their reconciliation process.
Such solutions pose a challenge to banks as the transaction account anchors the relationship with the customer and is the starting point from which other products and services, which only banks are licensed to offer, can be cross-sold. While retail banks see this as an opportunity to offer savings products and mortgages, transaction banks also view the current account as the sticky part of the customer relationship. “The current account is the most important thing to a bank now,” says Karen Fawcett, group head of transaction banking at Standard Chartered.
Core instrument
One reason for banks to focus on the current account is the need to attract deposits to meet the liquidity coverage ratios under Basel III standards. George Nast, global head of product management in Standard Chartered’s transaction banking division, says: “The current account – or what we call the operating account – has always been central to our business. Because of the regulatory changes it is going to become even more important. It is the core instrument, which in many ways creates an operating relationship with the client. Under Basel you get a liquidity benefit if you have commercial liabilities of a certain tenor.” He explains that a one-month term deposit has a negligible worth from a regulatory point of view. “If you have an operating account it is treated like a long-term liability,” he says.
Michiel Ranke, who heads the product management team for liquidity in RBS’s international banking division, says: “Since the financial crisis, it has become more important to think about what happens to the current account, both on the credit and debit side. In the past, an overdraft facility may have been given away for free, but this is becoming more of a challenge now that banks have to meet stronger capital requirements. And banks are also more aware of current account balances because these liabilities have become a more important source of funding.
Mr Ranke believes that many banks have underestimated the importance of the current account. “I believe the current account is our biggest product, especially for transaction banking. It is the core of our business,” he says. “I treat it as a product in its own right and we have product managers working on it.”
Banks have to decide whether to charge customers for the current account on a stand-alone basis or give it free to attract deposits and use it to cross-sell other services. This is something that the UK has to address in the retail banking space, where consumers have what they perceive to be ‘free banking’.
Something for nothing?
Unlike many other markets where consumers are charged account or transaction fees, current accounts in the UK have been typically cross-subsidised by penalty charges. However, penalty charges for being overdrawn came under public scrutiny and in 2008 the Office of Fair Trading pursued legal action against banks in the High Court to challenge the fairness of the charges. While penalty charges are obviously unpopular with the general public, so is asking consumers to pay for a current account that they expect to be free.
“Having the ambition of giving something for free and giving good service – that is very difficult,” says Rami Aboukhair, head of products and marketing at Santander UK. Mr Aboukhair is the architect of Santander’s 123 current account, which charges a monthly fee but comes with a rewards programme. Customers get 1% cash back on mortgage, water and council tax payments, 2% on gas and electricity bills and 3% cash back on communications bills.
“When you pay for something, you ask for the value behind it. We wanted to charge a fair price – £2 a month is good value,” he says. “The customer is king and the customer is saying ‘yes’, they are happy to pay.”
The 123 current account was launched in March 2012, and between the end of December 2011 and the end of June 2013, Santander has seen its current account balances increase by £9.3bn ($14.38bn) to £21.3bn. In the first half of this year, 600,000 customers signed up for the 123 account, 130,800 of whom had switched from other banks.
Switching accounts
Such switching will be made even easier for consumers from September 2013, when the UK’s Payments Council launches the Current Account Switch Service. The service aims to increase competition in the UK current account market and make it easier for consumers to vote with their feet. Once they have chosen a new account and agreed to the switch, all their regular payments will be transferred to the new account for them. The service guarantees to refund any charges incurred if anything goes wrong during the switch and will also redirect any one-off payments sent to the old account for 13 months.
When asked about the impact the switching service will have on the competition in the UK current account market, Anthony Browne, chief executive at the British Bankers’ Association, says: “Banks compete vigorously for business and customers should take full advantage of this competition to get the bank account that’s best for them. Making it easier to switch current accounts should absolutely promote competition between banks, which should enhance customer experience and spur innovation. That, in turn, might attract more people to move, but recent research by the Office of Fair Trading shows that the overwhelming majority feels no need to switch because they are happy with their bank.”
The Payments Council has also been working on a project that has significance for current accounts in the UK. Its mobile payments project, due to be launched in the first half of 2014, will mean that banking customers in the UK can link their current account with their mobile phone number to enable person-to-person and person-to-sole-trader payments. Instead of paying a window cleaner, for example, with cash or a cheque or taking their bank details to pay them online, funds can be sent to their bank account – online or via a smartphone app – by inputting their mobile phone number.
Mr Broxis explains that MyBank also plans to launch a similar initiative in 2014 so that money can be sent using the mobile phone number as a proxy for the bank sort code and account number.
Card killer?
Combining mobile technology with bank-to-bank connectivity has enormous potential and could eventually displace the need for cards. In the UK, innovation is being built onto the Faster Payments platform, the real-time bank-to-bank payments infrastructure that was built and is processed by VocaLink. Linking bank accounts with mobile numbers is a layer on top of this to enable person-to-person mobile payments, and another layer is to take mobile payments to retailers in the physical world.
VocaLink has created Zapp, an independent subsidiary scheduled to launch its service in mid-2014. Zapp will enable consumers to pay directly from their bank account online or in-app from their smartphone or at the point of sale with their mobile device.
Moving the mobile bank-to-bank solutions to the physical world in this way has already begun in Poland. In March, PKO Bank Polski launched the IKO app that means in-store payments, online shopping and ATM cash withdrawals can be done with a smartphone. The scheme began as a closed-loop system between the accounts of the bank’s retail customers and the acquiring division’s merchant accounts. In July the scheme was widened when six of Poland’s largest banks joined forces to create a payment system where consumers can pay at retailers with their mobile phone directly from their bank account.
With mobile technology being linked directly to current accounts in this way, it is possible that traditional card payments will be displaced. Mr Bareisis at the EC, however, notes that the strength of networks such as Visa and MasterCard is their internationally recognised acceptance brand and global interoperability. Although some solutions are starting to be developed that focus on the current account, building them into extensive payment schemes will be challenging.
Such innovations mean greater choice for consumers, as banks formulate new business models to adjust to changes in regulation, competition from non-banks and advancements in mobile technology and real-time payments. The good news for the humble current account, though, is that it is no longer playing a supporting role and is now taking centre stage.
