Irish banking sector is uncompetitive - study

Ireland’s uncompetitive banking sector has locked customers into accounts and cost small businesses millions in loan charges, it emerged today.

A report commissioned by the Competition Authority (CA) revealed consumers had been let down in several key areas including being hit with massive lending costs and being forced to stick with the one bank for years.

The study found the country’s two largest banks, Allied Irish Bank and Bank of Ireland, controlled more than 70% of the country’s 3.9 million personal current accounts.

The report also showed banks’ failure to pass on interest rate cuts had cost small businesses up to €85m per year.

Dr Terry Calvani, director of the authority, said the sector had failed to provide a fully open market and firms were paying a huge price for wanting to borrow money.

“The bottom line is that banking in Ireland is not competitive in several important areas,” he said.

“Customers are locked into their existing bank, it is difficult for new banks to enter the Irish market and small businesses are finding it very expensive to borrow money.”

Customers are “locked in” by the cost of switching charges and therefore there was little incentive for banks to offer innovative products such as interest-paying current accounts, the report said.

The study, conducted by LECG, made a total of 40 recommendations designed to enhance competition between the market leaders AIB and BoI, and other financial institutions.

One of the key steps is to bring in legislation to make it easier for customers to switch banks without incurring penalties and that IFSRA should foster interest rate comparisons.

LECG also recommended the banks should be required to inform customers of the margins they earn on the difference between their advertised rates and the prevailing European Central Bank rate.

The report, part of the Authority’s Study of Competition in the non-investment banking sector in Ireland, also found little competition on interest rates paid on current accounts.

And the current account market in Ireland is characterised by numerous barriers to entry and innovation.