ACM: savings rates lag behind due to too little competition
Lack of competition between banks is a major cause of the low savings rates for consumers. This is one of the conclusions of a study conducted by the Netherlands Authority for Consumers and Markets (ACM) into the functioning of the Dutch savings market. The lion’s share of Dutch savers has savings accounts with one of the three major Dutch banks (ABN Amro, ING, and Rabobank), and few consumers switch to a different bank that offers higher rates. As a result, the major banks experience insufficient competitive pressure to increase their savings rates. In its provisional report, ACM offers the Dutch legislature recommendations for lowering switching barriers for consumers, which will boost competition on the savings market. This provisional report has now been published for consultation.
Martijn Snoep, Chairman of the Board of ACM, adds: “The results of our study into the savings market show that competition on the Dutch savings market is not functioning properly at the moment. One solution is lowering switching barriers, thereby making it easier for consumers to switch and to benefit from higher savings rates. At the moment, ACM cannot lower switching barriers. That is something the legislature must do.”
Insufficient competitive pressure
Recently, consumer savings rates on savings accounts with the major banks have lagged behind the higher interest rates of the European Central Bank (ECB). ACM has looked into a possible lack of competition on the savings market as an explanation for this phenomenon. The study reveals that the three major banks control the vast majority of the savings market. ACM has not found any indications of illegal agreements between the major banks to keep rates low. However, it is plausible that there may be ‘tacit coordination’ between the major banks concerning the savings rates. This means that banks keep an eye on each other’s interest rates and closely follow each other’s moves instead of competing with one another. With no mutual agreements in place, such conduct is not prohibited, but the effect thereof is similar to that of a cartel, and, as such, leads to consumer harm. Consumers get lower interest rates than they would have in a competitive market.
Switching barriers
The lack of competition on the savings market is primarily caused by the fact that the group of consumers that do switch (or that threaten to switch) is small. The majority of consumers is satisfied with their current banks, as revealed by consumer surveys. However, a group of consumers does seem to be insufficiently familiar with alternative savings products with higher interest rates. In addition, a large share of consumers has a strong preference for the Dutch major banks and have little confidence in non-Dutch banks. Also, consumers experience switching barriers, such as the complexity of savings products (or the complexity of comparing those products) and the mandatory tying of savings accounts and checking accounts (or current accounts) by banks.
ACM currently does not have powers to take measures to boost competition on the Dutch savings market. That is something the legislature must do. In several other countries, the national competition authority is able to impose measures in such situations in order to boost competition, for example, measures that help consumers get more information and switch banks. With additional powers (for example, a so-called New Competition Tool), ACM will be able to take action against inadequate competition.
Recommendations
ACM offers the Dutch legislature several recommendations for boosting competition on the savings market. These are mainly about lowering switching barriers for consumers and, in that way, strengthening competitive pressure. Banks will experience more pressure to prevent the loss of customers and savings, which is a key factor in determining savings rates. The most important recommendations are:
- Make the banks’ provision of information more transparent
Consumers are insufficiently familiar with the range of products available on the savings market. One solution consists of improving the information offered by banks and comparison websites to consumers, for example by mandating banks to publish each year the breakdown of their savings rates, and to present current savings products in an easy-to-understand manner, using clear examples.
- Prohibit tying of checking and savings products
With several banks, it is only possible to open a savings account in combination with a checking account. That is an unnecessary switching barrier. Consumers must be able to open a full-fledged savings account without opening or having a checking account with the same bank.
- Create a mandatory switching service for banks
A switching service for banks will lower the barrier to opening a new savings account. Consumers will then relatively easily be able to inform another bank how much money they wish to transfer to a new savings account, after which the old and new bank settle this among themselves.
Oversight of the financial sector
ACM enforces compliance with the competition rules, and has the power to conduct market studies into the functioning of markets. As part of this broad market study into the Dutch savings market, ACM has collected information from banks, sector-specific regulators the Dutch Authority for the Financial Markets (AFM) and the Dutch central bank (DNB), and other relevant market participants.
The Dutch Ministry of Finance had asked ACM to see if there was reason for launching a study into the savings market and into the savings rates in the Netherlands, which are lagging behind the interest rates of the European Central Bank (ECB). ACM did see sufficient reason for such a study, and therefore decided to launch one. ACM’s report will be available for public consultation. Interested parties have three weeks to submit opinions. ACM will take these opinions into consideration when drawing up the final report.