A suggestion for doing something about account switching in the UK

Account number portability might make it easier for consumers to switch bank accounts, but it’s a mistake to think that bank account numbers are like mobile phone numbers.

BBC Moneybox is a fixed point in my week. It’s a window for us fintech types to peer through to look into the kitchens of ordinary consumers the length and breadth of the country. It’s a really good way of understanding the real issues that people see in dealing with a variety of financial services organisations and therefore provides constant inspiration as to where new kinds of products and services might be built around new technology to improve things for all.

I happened to be listening to a recent episode when the issue of current account switching in the UK was raised. For those of you who haven’t been following the story, some time ago the British government forced the banks here to spend an enormous amount of money on a system to speed up the switching of current accounts because in 2011 the Independent Commission on Banking (ICB) wanted to make it easier for customers to change from bank to bank and therefore to increase competition in the retail banking sector.

Switching bank accounts became quicker and simpler following the introduction of new ‘faster switching’ rules in September 2013.

[From Switching bank accounts – how to find the best current account deals | This is Money]

Oddly, neither the ICB nor the Payments Council asked for my opinion — which was to look at portability — and instead decided to build a big computer system to shift payments and so forth between bank accounts. The system, known as the current account switch service (CASS), was complicated and expensive, as big computer systems generally are.

Experts were impressed with the scheme, which has cost £750m.

[From More bank account switching? The number has actually fallen – Telegraph]

I wasn’t. A year ago, I took part in a CSFI roundtable discussion about the system and I think I may have annoyed some of the people present by maintaining that the system was pointless and wouldn’t make any difference.

October 16, 2013. The impact of current account switching on UK retail banking: A round-table discussion with Adrian Kamellard (Payments Council), Niamh Grogan (Lloyds Banking Group), Ashleye Gunn (Which?), David Parker (Accenture) and Dave Birch (Consult Hyperion).

[From Recent CSFI Events]

I also said it was a waste of time and money, a pointless political posture that would not make the slightest difference to competition in the retail banking sector. I wasn’t saying this from any kind of ideological perspective but from an examination of the facts on the ground.

So three-quarters of the populace were satisfied with the current system? It currently takes two to three weeks to switch bank accounts in the UK, but later this month it will take only a week. Who cares?

[From Do pointless things, faster – Tomorrow’s Transactions]

Now we are a year on, the numbers are in, the results are unequivocal. The number of people switching bank accounts has actually gone down. Some uncharitable persons, of whom I am not one, will undoubtably observe that a billion or so quid for a new computer system that makes things worse is actually run-of-the-mill for government-directed IT spending and an inevitable consequence of the combination of well-meaning but technologically illiterate politicians and IT vendors but I think this a harsh judgement.

In recent days news has arrived that the Financial Conduct Authority (FCA) has launched an investigation into the service but they seem to have added a little bit of special sauce, hopefully because of some of my old blog posts…

The Current Account Switch Service is not the only option to make switching easier for current account customers. Alongside our review of the new service we will also gather evidence on other options including account number portability (ANP).

[From Current Account Switch Service – Financial Conduct Authority]

Yes, they are going to take another look at portability.  I have a vague suspicion that there are still people who think that account numbers are a bit like mobile phone numbers (which they are not) and so they are about to waste another couple of billion quid on a system that will allow you to take your account number from one bank to another. I hope they’ll ask me about this  As part of their review, because there is an obvious way forward that doesn’t involve spending gazillions on management consultants and big iron.

First of all let’s recapitulate the central point. If people could keep their account number, while moving the actual account from one financial institution to another, it would undoubtedly make it faster (in fact, instantaneous) to switch accounts and might be a factor in increasing competition. I doubt that what consumers say about this is actually any indication of future behaviour, but for what it’s worth…

Consumers would be more likely to switch their bank if they could keep their account number, according to new Which? research… Three-quarters (76%) believe that the introduction of portable account numbers would make switching bank accounts easier… More than half of the people surveyed (55%) have never switched their current account.

[From Keeping bank account number would boost switching say consumers – September – 2012 – Which? News]

So. What should we do? Well, as I have bored people to tears with at length repeatedly over a period of some years, what we should do is use virtual account numbers.

I’ve written before about what the industry should have done, which is to create a virtual sort code and account number that customers can switch to wherever they like: that way, they give their employers and whoever else a single sort code and account number which never, ever changes, Then, if they want to switch bank, they re-route the virtual account and there’s no need to notify billers, counter parties etc to update their databases.

[From E-ASS about face – Tomorrow’s Transactions]

Let’s call this a VAN. A virtual account number. Now, you know how all mobile phone numbers in the UK begin with a “7”. Well, what if all virtual account numbers in the UK began with “7” as well? It turns out that the “7” sort codes in the UK have an unusual history…

Individual sort codes within the range 70-00-00 to 70-99-99 were allocated on a one-off basis to the many London offices of private and foreign banks… By the 1990s, all these banks had been issued with sort codes within the ranges of the various clearing banks which, henceforth, acted as clearing agents for them… and use of the 70 code range was discontinued.

[From Sort code – Wikipedia, the free encyclopedia]

That’s right. The 70 code is unused, so we can issue people with VANs of the form 70-ZX-XX 99999999. These would be compatible with all existing systems and with the IBAN scheme. I suggest that we use that “Z” in the VAN as a good old-fashioned check digit, leaving 11 digits for the individual account numbers, making a “70 solution” for ANP that is feasible with no impact on existing systems. I think it would be rather fun to have all mobile phone numbers starting with a “7” and all mobile bank account numbers starting with a “70”.

As there are less than 100 million bank accounts in the UK, the scheme provides multiple VANs for each person, business, charity, government department and so on in the UK, which ought to be adequate for the foreseeable future, and could be kickstarted with absolutely no effort by consumers at all. The initial database mapping the virtual account numbers to the real account numbers can be created in an overnight run by the banks exporting all current account numbers to the virtual account number system. Then consumers could use their home banking authentication to log in to the virtual account number system (with the obvious acronym VANS) to “claim” their VAN by adding their relevant contact details, such as a mobile phone number and email address, and more importantly to change the target account number whenever they wanted. The system might even reserve a few vanity VANs like 7X-XX-XX 00000007 or 7X-99-99 87654321 or 7X-99-99 99999999 for auction to the highest bidder to help fund the system.

Having lots of VANs is useful. I might have a work VAN and a home VAN, for example. My wife and I might decide to have three VANs: one that maps to our joint account and one each to map to ask individual savings accounts. When opening a new bank account, consumers would be asked whether they wanted to use an existing VAN or create a new one: the new VAN would be created or the existing VAN directed to the new account there and then.

An obvious extension of the VAN scheme would be to allow consumers to direct payments to the mobile phone number or e-mail address registered against the VAN, thus providing the functionality of PingIt and PayM but at a more general level. You might even allow consumers when claiming a VAN for the first time to choose a “Payment Name” for that VAN, just as they choose a Twitter name or a Facebook name… Now that’s an idea.