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Text of Nordic Retail Banking

Report from the Nordic competition authorities

No. 1/2006

Competition in Nordic Retail Banking

ISBN9188566382

PrefaceAtthelastmeetingbetweentheNordiccompetitionauthoritiesintheFaroe Islands2425August,2005,theDirectorGeneralsdecidedtoformaworking groupwiththeaimofcompilingareportoncompetitioninretailbankinginthe Nordiccountries.Theareaisimportantformanyreasons.Noconsumercan managewithoutaccesstoretailbanking.Anefficientfinancialsectorisa prerequisiteforanefficientandglobalizedeconomy.Anumberofreformsare currentlyunderwaythatwillshapethemarketconditionsformanyyearsto come.Inaddition,competitionconcernshavebeenraisedconcerningthe concentrationinthemarket,thelowdegreeofconsumermobility,andthehigh profitability. AworkinggroupwassetupwithSwedenaschair,commissionedtoanalysetwo specificareasofconcernforcompetition:accesstopaymentsystemsand consumermobilityintheNordicretailbankingmarkets. Thegroupmetonthreeoccasionsandconsistedof: DanishCompetitionAuthority FaroeseCompetitionAuthority FinnishCompetitionAuthority IcelandicCompetitionAuthority NorwegianCompetitionAuthority SwedishCompetitionAuthority CarstenSmidt JesperMlbk HeriJoensen PirjoAspinen ArttuJuuti AnneRm KristjnIndriason GeirPettersen KjellArildRein, IngerJohanneArildsenRygh KristjnRyste AnnCharlotteDorange,chair KarlLundvall

ThisisthefifthreportofitskindbytheNordiccompetitionauthorities. 1 The purposeistostimulatedebateandtocontributewithapanNordicperspective onhowcompetitioncanbeimprovedtothebenefitofconsumers.

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ReportsfromtheNordiccompetitionauthorities:NordicFoodMarketsaTasteforCompetition,(2005), TelecompetitionTowardsaSingleNordicMarketforTelecommunicationServices?(2004),APowerful CompetitionPolicy.TowardsaMoreCoherentCompetitionPolicyintheNordicMarketforElectricPower, (2003),CompetitiveAirlines.TowardsaMoreVigorousCompetitionPolicyinRelationtotheAirTravel Market,(2002).

Content1 Introduction ............................................................................................................. 6 1.1 1.2 1.3 2 2.1 2.2 2.3 2.4 2.5 3 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 4 4.1 4.2 4.3 4.4 4.5 5 5.1 5.2 5.3 5.4 5.5 5.6 6 6.1 6.2 The Nordic perspective................................................................................... 6 The European perspective .............................................................................. 7 Purpose, delimitations and outline ............................................................... 9 Major banks in the Nordic countries........................................................... 11 Newcomers ..................................................................................................... 16 Market concentration .................................................................................... 17 Profitability ..................................................................................................... 21 Conclusions..................................................................................................... 24 The importance of interbank payment systems ........................................ 27 Payment process ............................................................................................ 27 Interbank payment systems in Nordic countries ...................................... 31 Access to the payment systems.................................................................... 37 Decision-making about attaching new members to the network ........... 38 Cooperation and competition ...................................................................... 41 Joining costs .................................................................................................... 42 Allocation of fees............................................................................................ 43 Case law .......................................................................................................... 45 Conclusions..................................................................................................... 46 Cash withdrawal card systems .................................................................... 47 International payment cards ........................................................................ 51 National payment card systems .................................................................. 55 Competition issues ........................................................................................ 59 Conclusion ...................................................................................................... 74 Barriers to customer mobility....................................................................... 76 Important factors when choosing a bank ................................................... 78 Empirical data on customer mobility.......................................................... 82 Barriers to switch bank.................................................................................. 84 Switching behaviour how to boost it ....................................................... 89 Conclusion ...................................................................................................... 92 Conclusions..................................................................................................... 94 Recommendations ......................................................................................... 98

Retail banking markets ....................................................................................... 10

Interbank payment systems................................................................................ 26

Access to payment card systems ........................................................................ 47

Customer mobility................................................................................................ 75

Conclusions and recommendations .................................................................. 94

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1

Introduction

Banksplayacentralroleintheeconomy.Bankstransferrisk,provide liquidityandfacilitatetransactionsbylinkingsaversandborrowers throughaprocessoffinancialintermediation.Theservicesthatthebanks offeralsofacilitatetheexchangeofservicesandgoodsbetweenproducers andconsumers.Thislowerstransactioncoststhatindividualsotherwise wouldface,leadingtoincreasedbenefitsforthesociety.Anefficient bankingindustryisthereforeimportantfortheeconomyasawhole. Financialserviceshaverecentlybecomethefocusofseveralsurveysand studiesbothatnationallevelandatinternationallevels.TheEuropean Commissionhasundertakensectorinquiries 2 inthefinancialservices industryandrecentlytheEuropeanCompetitionAuthorities(ECAs)jointly publishedareportabouttheretailbankingindustryin17countries.Many nationalcompetitionauthorities,NCAs,alsocarryoutstudiesandreports aboutthefinancialservicesmarkets,especiallyfocusingonpayment systemsandconsumermobility.

1.1

The Nordic perspective

ThefinancialsectorsoftheNordiccountrieshavebeentheconcernof competitionauthoritiesforyears,giventheimportanceofitsroleforthe economies. AtthelastNordicmeetingbetweentheNordiccompetitionauthoritiesin August2005,aworkshopwasheldconcentratingonconsumermobility andentrybarriersinretailbanking.Thepurposeoftheworkshopwasto identifypossiblecommonentrybarriersintheNordicfinancialmarkets.At theworkshopitwasconcludedthatthemarketstructure,atleastatafirst glance,seemssimilarinthatthereisahighconcentrationinthemarketand fewnewcomers. 3 Thiscanbeanindicatorofpoorcompetition.Ifthereis insufficientcompetition,thismayresultinsubstantialsociallossesdueto highprices,alackofinnovationandinefficientcapitalmarkets. SectorInquiryRetailBanking,InterimReportI,CardPayments(2006),EuropeanCommission. TheNorwegianretailbankingmarketwasexaminedintheDnBNORmergercase(2003).The NorwegianCompetitionAuthorityconcludedthattherelevantmarketsforseveralretailbanking products,e.g.lendingtoSMEsandtohouseholds,arelocalorregional.TheNorwegianCompetition Authoritywantstoemphasizethattheaggregatefiguresonmarketsharesinthisreportdoes notnecessarilyrepresentanyopiniononrelevantmarketshares,asthesemaybedefinedaslocalor2 3

regionalinspecificcases.

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Thefinancialsectorhascertaincharacteristicsthatmayindicaterestrictions oncompetition.Thisincreasedriskrelatespartlytotheeconomic characteristicsofthesector,suchasthegenerallyhighdegreeof concentrationduetotheexistenceofnetworkeffectsandentrybarriers. Alsoregulations,specificallydesignedforthefinancialsector,affectthe behaviourofmarketplayers. TheSwedishCompetitionAuthorityreleasedareportinJanuary2006, TermsofAccesstoPaymentSystems:TheDifferentPositionsofSmalland LargeBanks.Themajorconcernsinthereportareconsumerimmobility andaccessconditionstodifferentpaymentsystems.Thereportrevealsthat smallerbankshaveacostdisadvantagecomparedtotheirlarger counterparts.However,itcannotberuledoutthatthiscostdisadvantageis reasonable,consideringtheeconomiesofscaleintheproductionandthe highervolumethatthelargerbankscontribute.Anotherimportantfinding inthereportisthatSwedenhasveryfewATMs. ThecustomermobilityinthefinancialsectorintheNordiccountrieshas beenstudiedinMobilitetenidennordiskefinansiellesektorbyNordisk Ministerrd(2005).Thestudyshowsthatthereisgreatvariationincostfor theconsumeraswellasservicesprovidedtotheconsumer,bothata nationallevelandataninternationallevelbetweentheNordiccountries.In additiontothesedifferences,thefinancialinstitutionsusedifferentkindsof loyaltyprograms,customerpackagesandproductpackages.Theinterest feesalsodifferagreatdealbothnationallyandamongtheNordic countries.Thereportalsoshowsthat45percentofthecustomerschanged bankin2004. 4 Theconclusiondrawninthereportisthatthereisless customermobilityintheNordicfinancialsectorcomparedtoothersectors.

1.2

The European perspective

Itisdifficulttoanalysethe

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