Michael Dowling: Lack of choice for bank customers damages vibrant economy
Banks do not rank in the top 150 companies by consumers for their service levels. File Picture: Denis Minihane
With the exit of KBC and Ulster Bank from banking in the Republic, the choice for personal and corporate customers is now very limited.
That all adds up to the three dominant players having the freedom to decide on the interest rates they charge borrowers, the interest rates they offer savers, and the fees they charge for banking services. This is a poor outcome for a vibrant economy.
In the residential mortgage market, there are nine mortgage providers. However, three of the outlets are wholly-owned by AIB, and two other players cannot lend at present due to funding issues, and the credit unions have about 1% of the market. AIB, Bank of Ireland, and Permanent TSB between them command a huge market share.
There are more options available in the savings market, but the setting of deposit rates is led by the three main players, who offer pathetic returns.
There are multiple reasons why we lack competition and will not attract new players to the banking market.
Following the banking crash, the capital requirements of Irish banks imposed by the Central Bank are much higher than across Europe.
The capital requirements have not changed, even though the three players have essentially addressed their problems of non-performing loans.
Capital requirements were one of the reasons cited by Ulster Bank and KBC for exiting, saying they could not make appropriate returns for the capital invested in their Irish operations.
The inability for banks to “perfect your security” is another major problem. This is the room for lenders to repossess the asset when the borrower fails to pay or engage over a reasonable period.
The latest Central Bank statistics show a large number of mortgage accounts are still in long-term arrears. No other country in the world would allow this situation to persist, and in my discussions with potential entrants to the market, it is an issue that is often mentioned.
The consequences of the lack of competition are evident in many other ways. Irish borrowers face expensive mortgage rates, and the recent picture has improved only because the banks have not increased variable rates, even though their tracker and fixed rates have risen.
The group that has the most to complain about is depositors. The European Central Bank has increased rates by 3% in the last nine months, with more rate hikes to come, yet depositors are being badly served.
This is the most perfect example of the lack of competition and it is no coincidence that the share prices of all three banks have increased significantly in the last six months.
The service levels offered by all banks is awful. Since 2020, service levels in the mortgage market from all the incumbent players have deteriorated. Service levels deteriorate, improve, and then get worse again over short periods.
Delays of two months in securing an approval in principle for a mortgage loan are not uncommon. Currently, one lender is taking six weeks to issue an approval in principle; another lender takes three days.
This level of service, with all the added frustration it entails, is not acceptable. Credit unions, for the last eight years, have won awards for their service levels, yet banks do not rank in the top 150 companies by consumers for their service levels.
Having dominant players means they control the agenda around the level of innovation in the Irish market.
Why are long-term fixed mortgage rates of 15 to 30 years, with the ability to make part-capital repayments of 10% or more, not available in this market from the three main banks?
I am not sure this issue will be resolved in the short term, but “disruptor” institutions such as Revolut will ultimately force banks to change their service and product offerings.
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