How do we know when a market is working well? We need new and better answers to that question, not least in light of the recent general election result. I say that because it seems to me that some of our current definitions of a “good” market aren’t actually doing a very good job of making markets work better and more fairly for the people in them.
Here’s an example: switching supplier. In several sectors, regulators and others use the number of customers who switch supplier as a measure of how well the market is working. The theory, which is sensible but limited, is that the more consumers “engage with the market” and shop around, the more economic pressure suppliers will be under to compete for custom meaning they will give those customers a better deal.
Competition and consumer engagement are both good things, but the flaw in that approach is that it can mean we end up spending too much time looking at the wrong targets and measures, ignoring other issues. Consider bank accounts. The broad thrust of regulation here has long been to encourage more people to switch banks more often, to keep the banks on their toes and offering better deals and better services.
As a result, around 1 million people each year switch accounts, which is a good thing. But should we now seek only to increase that number? Too narrow a focus on switching could have perverse outcomes. That overall switching rate could rise, for instance, if some of the people who are already in the habit of shopping around did so a bit more frequently. The results might benefit them, but is that a priority? We know, after all, that many such “engaged consumers” are wealthier and more highly-educated than average.
And while increasing their engagement with the market is a good thing and one that could, theoretically, deliver benefits to all consumer, there’s a risk that fixating on switching rates, whether in current accounts or household energy supplies, distracts us from thinking about improving things for the people who don’t switch and end up missing out. In short, our understanding of a “good” market should include more than switching rates.
That’s one of the things we’re looking at as part of some SMF research on financial services, kindly supported by Bacs, operator of the Current Account Switch Service, which we’re launching in September. We’re interested in other ways to measure how well a market is working for the people in it, particularly those with less money and economic power.
In context of the current account market, that means the “unbanked” (there are still 1.5 million people who don't have a current account‚remember that when you next log in to your account on your phone using just your thumbprint) and the vulnerable, a group that's much harder to define but which includes people in insecure employment or no employment, people who aren't online, and people who are facing serious physical or mental health problems.
For such people, ease of switching accounts probably isn't the best measure of how well the market is working. So we suggest that the industry and its regulators think more about how to look for signs of vulnerability, to measure it and providers’ record in addressing it, and to encourage providers and consumers alike to think and talk about vulnerability and its consequences.
Some banks are already thinking and acting. Lloyds is the latest to work with cancer charities to encourage newly-diagnosed customers to talk to the bank about their financial needs during their illness. Lloyds is a giant following in smaller footsteps: Nationwide established its cancer service two years ago. Among suppliers big and small, we're going to need to see a lot more of that sort of approach in the years ahead, and not just for cancer patients: a better offer for dementia sufferers and their families is surely a requirement for a “good” market in financial service.
And that’s not something that can be measured by the number of people who shop around and switch accounts.
