What will make banks care about their customers?

Yesterday I gave evidence to the Parliamentary Commission on Banking Standards, on competition (lack of) in retail banking – alongside two distinguished former competition regulators, John Fingleton and Clare Spottiswoode. The transcript will be published later. My message was that banks are mistaken when they say they are competing vigorously with each other – just look at the cut-throat rates on offer in the ‘best buy’ comparison tables. My experience on the Competition Commission for eight years taught me that big firms always regard their competition as intense but they can’t distinguish their intense oligopolistic rivalry from a competitive market. That intense – often loss-leading – rivalry over a narrow range of goods for a small group of customers is cross-subsidised by high margins on other extensive areas of business. (Indeed, you can tell what the banks think of the small group of mobile customers they are competing over from the fact that the industry term for them is “rate tarts”.)

Most bank customers are inert. Switching banks is a huge hassle. If it goes wrong, the consequences are an even bigger hassle, causing enormous potential disruption to bill payments and so on. The only alternatives available will be just as poor in terms of service quality or rates offered. The lack of switching and the cross-subsidies between different groups of customers are clear signs that competition in retail (and SME) banking in the UK is inadequate.

Understandably, there has been a lot of focus since the crisis on tougher regulation. But regulation alone will not improve things for customers. If you rely on regulation to improve service standards, banks will focus on their regulators. It will take competition to get them to focus on their customers. Indeed, more and more regulation will make it harder to get new competitors into the market, and the regulators are not sufficiently focused on using competition as a tool to achieve their aim of improving consumer outcomes – after all, regulators regulate. Competition works indirectly but it is a powerful force for serving consumers, and in particular for innovating and anticipating customer needs.

There is a good example in the Competition Commission’s decision to break up the BAA airport monopoly. The counter-argument was that there are economies of scale, and it’s a complex business, with break-up disruptive and uncertain. But who would have predicted that after the divestment, Gatwick Airport proved able to clear the unexpected snow off its runways quickly and efficiently in December 2010, while Heathrow, still in the hands of the old monopolist, was paralyzed for days?

I’ve not quite finished Anat Admati’s and Martin Hellwig’s [amazon_link id=”0691156840″ target=”_blank” ]The Bankers’ New Clothes[/amazon_link]. It’s absolutely excellent at skewering the bogus claims the banking lobby makes about the consequences of increasing equity requirements and limiting bonuses. It addresses regulatory issues.

What it doesn’t do is consider the competition question. Indeed, in all I’ve read about the banks in recent years, competition issues have been overlooked. There is a misperception that “too much” competition contributed to the crisis, I think, but that’s to make the same mistake of confusing a competitive market with oligopolistic feuding in some areas. The empirical evidence is mixed but leans firmly towards indicating that more competitive banking systems are more stable – the banks tend to be smaller so the “too big to fail” problem is less acute, and smaller banks are simpler so regulators (and their boards) can monitor them more easily.

The Parliamentary Commission on Banking Standards was, though, clearly well aware of the importance of increasing competition and new entry. More power to their elbow.

[amazon_image id=”0691156840″ link=”true” target=”_blank” size=”medium” ]The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It[/amazon_image]

Whose internet?

It was with great excitement that I read this morning that John Naughton‘s new book [amazon_link id=”0857384252″ target=”_blank” ]From Gutenberg to Zuckerberg: What You Really Need to Know About the Internet[/amazon_link] is out. I’ve ordered it pronto, and am sure it’s a worthy successor to his [amazon_link id=”075381093X” target=”_blank” ]A Brief History of the Future: Origins of the Internet[/amazon_link] from 2000; but meanwhile he has written a column about the new book in today’s Observer.

[amazon_image id=”0857384252″ link=”true” target=”_blank” size=”medium” ]From Gutenberg to Zuckerberg: What You Really Need to Know About the Internet[/amazon_image]

The theme of the column is the intensifying struggle to control the Internet – on the one hand by authoritarian governments, as demonstrated at the recent ITU-organised WCIT-12 World Conference on International Telecommunications, and on the other hand by large corporations – something that always happens in the communications and media sector, as Tim Wu documented in his brilliant book [amazon_link id=”B0092I2BFS” target=”_blank” ]The Master Switch[/amazon_link].

[amazon_image id=”B0092I2BFS” link=”true” target=”_blank” size=”medium” ]MASTER SWITCH THE AIR EXP by WU TIMOTHY ( Author ) ON Mar-01-2011, Paperback[/amazon_image]

Naughton writes: “Ever since the internet burst into public consciousness in 1993, the big question has been whether the most disruptive communications technology since print would be captured by the established power structures – nation states and giant corporations – that dominate our world and shape its development. And since then, virtually every newsworthy event in the evolution of the network has really just been another skirmish in the ongoing war to control the internet.”

Interestingly, I heard some two years ago that China was becoming much more active in the UN organisations but especially the ITU (International Telecommunications Union) based in Geneva. Maybe that diplomatic investment is paying off. I agree with John Naughton that the struggle is going to be immensely important.

A fishy tale of monopoly power

There’s a fascinating article in The Washington Monthly about a kind of fish, the menhaden. The stocks are in precipitous decline, and as the fish is at the bottom of the food chain, other fish and birds are dying as a result, and the coastal waters near the shore are becoming increasingly covered in algae. Author Alison Fairbrother writes:

“Pound for pound, more menhaden are pulled from the sea than any other fish species in the continental United States, and 80 percent of the menhaden netted from the Atlantic are the property of a single company.”

The fish are used for feed pellets, cosmetics, fertilizer and many other products, including now Omega-3 fish oil for foods, so they are factory-fished. The business is more or less a monopoly – the company fishing menhaden out of the Atlantic is Omega Protein, coincidentally a significant donor to political campaigns.

The menhaden story isn’t new to me. In 2007 I read a marvellous and terrifying book about their decline, [amazon_link id=”1597265071″ target=”_blank” ]The Most Important Fish in the Sea[/amazon_link] by H Bruce Franklin.

 [amazon_image id=”1597265071″ link=”true” target=”_blank” size=”medium” ]The Most Important Fish in the Sea: Menhaden and America[/amazon_image]

Omega Protein is a renamed and merged corporate descendant of Zapata Oil, founded in 1952 by the future President George H.W. Bush – conspiracy theory material about it abounds. Omega Protein’s website mentions just a little about conservation of the fish stocks in its sustainability section. It claims:

“STATEMENT: Both the Atlantic and Gulf menhaden populations are overfished.
FICTON: Though this statement is often heard, it is not true. Both the Atlantic and Gulf menhaden are subject to regular stock assessments (a method to estimate the status of the population) conducted by the National Marine Fisheries Service. The most recent assessments (2010 for the Atlantic and 2006 for the Gulf) show that menhaden are not overfished and overfishing is not occurring.”

The Washington Monthly article is about exactly these official stock assessments – it’s well worth a read, as is the book.

Just like the banking industry, the story is one of how monopoly always subverts effective regulation (market power always turns into political political power); competition is important for multiple reasons. It’s also always illuminating to see how complex the modern economy is. One of the zillions of components of everyday products turns out to be an unimpressive fish you’ve never heard of.

Most importantly, with menhaden, as with other resources, having accurate data on the stocks is essential to make sure we are using enough – but not too much – to improve our own prosperity and leave at least as much for the next generation.

You probably haven't heard of the menhaden