It’s almost impossible to avoid these days: parents collecting money for Christmas gifts for teachers will ask to be paid through it, while friends out for dinner (or more like a coffee or a takeaway pint perhaps) will look to divide costs through it.
Just like “I’ll google” once replaced “I’ll search on the internet”, “I’ll Revolut you” has replaced “I’ll pay you” for many.
All of a sudden, it seems like the UK-based payments provider is everywhere. Thanks to the better functionality of its payments app, myriad payment options including Google and Apple pay, its cheap(er) foreign exchange and nifty payment and saving tools, it has racked up a staggering one million or so Irish customers.
And it's not the only new arrival. Fintech start-up N26, which has a German banking licence, told this newspaper on Tuesday that it expects to have some 200,000 Irish-based customers by early next year, but is ultimately targeting one million customers here. And all this for a bank which had just 10,000 Irish customers back in 2017.
And there are a host of other fintech players, including UK digital challenger bank Starling, savings marketplace Raisin, and London-headquartered Plum, a smart money management app, all with their eyes on the Irish market.
It’s enough, one might think, to frighten the incumbent banking players into slashing their fees and offering other incentives in an effort to bring their straying flock back into the fold.
Yet the opposite seems to be happening. So what’s going on?
Competition, it is said, is one of the surest routes to keeping prices keen and ensuring value for consumers. Despite the arrival of the aforementioned challenger banks, rather than feel the tight grip of competition, both AIB and Bank of Ireland are going in the opposite direction, and recently announced they were going to hike up fees for their current accounts.
From this week, thousands of customers of both banks will face an increase in banking charges, as they will no longer be able to avoid or reduce fees by keeping a certain amount of money in their current accounts. Instead, they will face significant increases in their everyday banking costs.
The reasons for this are fairly evident – for one, there is little benefit in banks holding more money than they need. With the appetite for personal lending subdued, and banks being charged for keeping money on deposit with the European Central Bank, banks don't want customers keeping so much money in their accounts. And they're certainly not going to incentivise them to do so.
As AIB told its customers, “the costs associated with deposits and credit current account balances have fundamentally changed” and “it’s no longer viable” to give a benefit– ie free fees – for having access to these funds.
Second, while banks have started to charge corporate and wealthier individuals negative rates on deposits, they are reluctant to do so for personal customers. A way around this, however, is to make the money up in other ways – such as fees.
While there may be reasons why banks have increased their fees, the scale of the increases – some customers at Bank of Ireland for example will see their fees rocket from €20 a year to €72 – are surprising, particularly given the increasingly competitive environment.
Deposit guarantees
The problem, perhaps, is that “competition” isn’t what it used to be. Unlike a full-service player coming into the market, such as in the days of Danske Bank and Halifax, the new fintechs offer very niche services.
Revolut, for example, doesn’t have a banking licence – or at least not one that covers its Irish-based users, as its Lithuanian banking licence does not at present. This means that savings with it are not covered by a deposit guarantee scheme, which typically covers up to €100,000.
And, while N26 is more akin to a mainstream current account, as it is a bank, it offers users a German Iban, and there have been problems using non-Irish Ibans in the Irish market, with some employers or utility providers unable to set them up on their payment systems. This means it may be difficult to use such an account as your main current account.
As a result – or up until now at least – users of these new providers will typically also have a current account with one of the mainstream players.
In addition, while N26 and Revolut may offer “free” banking, it’s typically only a very limited offering. While an account is free for example with Revolut, you’ll have to pay €4.99 to get your card delivered and if you withdraw more than €200 a month, you’ll have to pay a charge of 2 per cent on the withdrawal. N26’s “free” options have similar limitations, and it is increasingly pushing its premium accounts, which have monthly charges, such as Smart, which costs €4.90 a month/€58.80 a year.
Account switching
The Irish market is also dysfunctional in that, regardless of the number of providers, consumers don’t exert enough competitive pressure themselves on banks. And the banks know this.
Data from the Central Bank repeatedly shows that Irish consumers are loathe to switch current accounts, with just 0.03 per cent of account holders switching in the second half of 2018 (most recent figures), a record low.
With this in mind, banks may believe they have little to lose from increasing fees, and more to gain.
It’s only if and when such newcomers start to offer broader banking services – including personal loans and mortgages – that the incumbent banks might start to act.
Earlier this year, in a briefing with analysts, BoI chief executive Francesca McDonagh was asked how customers choose their mortgage provider.
Her answer? “The vast majority will say they’ll go to the bank where they have their current accounts.”
And, for now, at least, that’s unlikely to change.
