People pay for absence of competition

Yes the financial crisis and resulting bailout of the banks have cost taxpayers billions. But a less discussed impact of the crisis has been the diminution of competition in the financial services landscape.

A combination of tighter regulation, diminished consumer appetite and the bad experiences of other foreign players may have scared off new entrants from making their way into the marketplace.

For consumers, this is bad news, as typically, the less competition there is, the smaller the range of options and the higher the prices.

So how are Irish consumers feeling the impact of a cosy club?

Current accounts

Back in 2006, Irish consumers had a staggering 14 current account providers to choose from and, unsurprisingly, free fees were pretty much a given in such a competitive marketplace.

Today, those options have reduced to just six (and two of those – AIB and EBS – are both part of the AIB group). This means that it can be difficult to avail of free fees – saving yourself about €200 a year in the process – unless you keep your account funded to the order of about €2,500 a month (AIB), or transfer at least €1,500 into your account each month (PTSB).

New entrants?

With such limited competition, margins are on the rise in the Irish banking market and, given the dearth of players, there is clearly an opportunity for a new entity to enter the market. However, given the experiences of foreign banks such as Halifax Bank of Scotland and Danske Bank last time around, regardless of what opportunities may lie in the Irish marketplace, it is unlikely that any board of a bank will convince its shareholders to invest in Ireland.

In the short term then, competition on the current account front is likely to come from pan-European mobile operators, who can offer their services in Ireland on a freedom of services basis.

Consider Number 26 for example. A subsidiary of German bank Wirecard Bank, (regulated by the German Federal Financial Supervisory Authority, BaFin and a member of the Deposit Protection Fund of the Association of German Banks), it launched in Ireland late last year. It offers a current account specifically for the smartphone, and allows users to send money to friends via text message or email with just a few clicks.

It is linked with a MasterCard that can be used worldwide to make purchases or receive cash at ATMs without incurring fees, or foreign transaction fees, Number 26 promises.

And it’s not the only one.

Revolut is a global money app, which promises to cut your hidden banking fees to zero, and it's also available for Irish residents.

You do not pay any fees to use the service – Revolut makes its money by earning fees from merchants every time you use your card. Through an app, you can exchange currencies at interbank rates, send money through social networks and spend with a multi-currency card everywhere MasterCard is accepted.

The app doesn't charge you to transfer money and you can also get a physical Revolut card. UK-based Revolut is not regulated by the Financial Conduct Authority, but clients' funds are kept in a ring-fenced account at Barclays Bank.

Mortgages

In the absence of Danske Bank and Halifax Bank of Scotland, putative home buyers today only have five real choices. AIB, as we have said, owns EBS, and Haven, while

Bank of Ireland

owns mortgagestore.ie. And the market is dominated by these two players. Davy figures show that AIB had 36 per cent of the market in the first half of 2015, with BoI accounting for an estimated 25 per cent.

And as has been clearly demonstrated, the lack of competition has meant the banks are under limited pressure to cut their variable rates, despite pressure from Government to do so. Figures for end-November show that the average variable rate on an Irish mortgage is 3.4 per cent. Contrast this with the European average of just 2.05 per cent and it is clear that Irish consumers are missing out.

New entrants?

But, finally, competition may be on the way.

The Australian-owned third-party loan administrator Pepper Group entered the Irish mortgage market at the start of February, becoming the first new lender in the Irish market since 2008. It will sell mortgages through a small number of about 20 brokers.

Rates, however, will not break new ground, with standard variable rates starting at 3.55 per cent for owner occupiers. So it is unlikely to exert significant pressure on the other lenders which would force rates downwards.

Investec, which offers mortgages in the UK market, has also been touted as a potential contender to move into the mortgage space in Ireland for some time now.

Credit cards

The departure of US credit card specialist MBNA from the new cards market has been missed by some credit card users as it typically had some of the best rates on the market. In 2012, it was sold to Spanish-based Avant, and, while existing customers can continue to use their credit cards, it is now closed to new customers.

The exit of Danske Bank and Halifax also means a smaller pool of providers to choose from – and higher rates if you don’t pay your credit card back on time.

While it is possible to get a card with a relatively low APR, at 13.6 per cent through AIB’s Click card, the card has a maximum limit of just €1,500 which may preclude some from using it.

Typically, rates are closer to 20 per cent on purchases, with a top rate of 22.7 per cent from both AIB and Ulster Bank.

New entrants?

While it is possible that a new entrant will emerge, it’s probably unlikely in the short term. Following the introduction of the personal insolvency regime, card operators may be reluctant to offer unsecured debt which may end up being written off.

Investment products

But it is not just the banking sector that has seen a sizeable reduction in competition. If you are in the market for life assurance, a pension or an investment product, it is likely that you will be purchasing a product from the diminishing number of providers that now dominate the market.

Consider the example of Irish Life, part of Canada's Great-West Life group, which combined with Canada Life in 2013. Today Irish Life has €64 billion in assets, and a hefty share across each of its markets. It is number one in the individual pensions, protection and investments market and number one for group pensions, protection and payout annuities, with more than 1.2 million customers.

With an adult population of about 3.5 million, it means that one in three Irish residents have an Irish Life policy.

If you step into a branch of any of the following – AIB, EBS, KBC, PTSB or Ulster Bank – and look for a product along the lines of a pension, life assurance, income protection, or an investment, you will end up with an Irish Life product. The only bank that does not have a relationship with Irish Life is Bank of Ireland, which is a tied agent of its own life company, New Ireland.

In addition, Irish Life has 151 individual financial advisers working around the State as tied agents. That means they can only advise and sell products from Irish Life.

Irish Life also owns financial broker Cornmarket, which serves the public sector, but this is not a tied agent and sells products from a range of product providers.

Tied agents have to give you a product that is suitable for your needs, but, and this is key, they cannot shop around on your behalf, which limits the choice, the effectiveness, and the cost of the product you purchase. It is a tightly controlled market. Back in 2002, the market share of the then four biggest players – Ark Life, Bank of Ireland Life, Irish Life and Hibernian Life – stood at 60 per cent. According to Central Bank figures for 2013, and assessed by actuary Tony Gilhawley of Technical Guidance, the current top four life companies (Irish Life, New Ireland, Zurich and Standard Life) controlled 87 per cent of the new business market – with the top two controlling 56 per cent.

Stockbroking

Like other sectors, the number of stockbrokers servicing the Irish market has also shrunk, with the departure of operators like

Bloxham

and Danske Bank, while wealth managers such as

HSBC

have also exited.

However, the provision of online broking services has meant the choice for Irish customers looking for an online execution-only style broker has probably never been greater. This means that competition has had the desired effect, with dealing charges down and choice up.

New entrants?

Earlier this year, Dutch online securities broker Degiro launched in Ireland, promising that Irish investors would save as much as 90 per cent by opting to trade through its new platform. The broker charges a fee of €2+0.04 per cent for trades on the Irish Stock Exchange, €4+0.04 per cent for the UK; and €0.50+$0.004 per share in the US.

So, buying €1,000 of Bank of Ireland shares will cost just €2.40 for example, compared with an average price of €26.40 among other brokers.

And Irish consumers have other choices, such as UK-based FXCM Securities and IG Securities.