customer mobility and patterns of customer behaviour. The section examines:
• market churn and the length of banking relationships;
• the extent of cross-selling in retail banking; and
• the practice of multi-banking by customers. Market churn and the length of banking relationships
Customer mobility in retail banking is likely to vary from product to product. There are indications that more shopping around is done regarding taking or switching mortgages and loans, due to higher potential price advantages.152 The interim report looked specifically at mobility related to current accounts. First, current accounts are the most widely held and used retail banking product. Second, unlike some other products such as customer loans which expire after a set time-period, current accounts are open- ended. There was reason to believe that it is not feasible to obtain data on mortgage or loan switching from respondent banks. Third, and partly because of the open-ended nature of the current account relationship, current accounts play a gateway role: banks often use current account as the basis for cross-selling other products to their customers.
Customer mobility by definition relates to customer behaviour, yet the sector inquiry was collecting data from banks and not customers. Customer mobility therefore could only be illustrated by the churn and longevity indicators with certain important limitations. Churn tries to capture the share of customers who change providers in a given year. Longevity is a measure of the average age of existing banking relationships. Figure 17 shows sector inquiry's results for current account number growth, churn controlled for market growth, and longevity in EU Member States:
150 Law of 4 August 2006 n. 248 – Decree Citizen-Consumer (Bersani Decree) 151 http://www.pattichiari.it/inside.asp?id=387
152 A number of responses on the consultation referred to observations of higher switching rates for products
Figure 17
Number of current accounts growth, Churn and Longevity. Weighted average. Year 2005. Consumers and SMEs
Growth Churn after control Longevity
Consumer SME Consumer SME Consumer SME
Austria 1.12% -1.49% 6.57% 10.42% 11.64 8.42 Belgium 3.39% -1.67% 5.27% 8.90% 10.04 9.99 Cyprus 6.28% 16.81% 10.33% 13.00% 6.65 4.63 Czech Republic 1.76% -0.07% 8.61% 10.70% 7.91 7.87 Denmark -0.20% 3.71% 10.02% 15.43% 12.06 9.75 Estonia Finland 0.67% -0.84% 4.23% 6.27% 17.44 13.98 France 1.82% 2.31% 6.84% 12.26% 11.06 8.39 Germany 2.55% 0.01% 8.46% 15.15% 11.55 9.85 Greece 8.34% 12.75% 2.36% 3.55% 4.34 5.23 Hungary 3.43% 12.33% 10.41% 17.59% 6.26 4.29 Ireland 5.04% 4.08% 5.44% 6.95% 8.13 10.14 Italy -1.54% 1.45% 7.68% 11.23% 9.39 8.23 Latvia 8.82% 6.31% 6.74% 7.13% 3.11 4.81 Lithuania 6.99% 9.02% 7.73% 3.34% 6.23 4.46 Luxembourg -2.98% 1.50% 6.46% 11.29% 7.20 6.45 Malta 9.06% 4.93% 5,39% 6,49% 8.83 6.64 Netherlands 0.24% 1.72% 4.17% 8.88% 14.33 10.45 Poland 4.30% 1.09% 9.11% 17.00% 6.18 4.04 Portugal 2.02% 1.70% 11,88% 14.34% 11.21 8.87 Slovakia 6.26% 2.40% 10.81% 15.80% 4.49 5.54 Slovenia 1.02% 1.21% 5.97% 10.89% 7.02 3.06 Spain 3.61% 1.58% 12.12% 10.34% 6.91 6.02 Sweden 1.66% 1.55% 5.62% 8.80% 11.82 12.33 United Kingdom 3.64% 0.81% 5.07% 13.72% 10.66 7.66 EU-15 Average 2.08% 1.42% 7.55% 12.21% 10.40 8.56 NMS Average 4.17% 3.28% 9.02% 14.82% 6.28 4.67 EU-25 Average 2.42% 1.72% 7.78% 12.63% 9.74 7.93
Notes: Growth rate: number of current accounts end of year / number of current accounts beginning of year.
Churn after control: (new currents accounts + closed current accounts) / (2* number of current accounts beginning of year).- absolute value of growth rate/2
Longevity in years
The estimates for EU-15, New Member States and EU-25 are country-level averages weighted by population.
Source: Commission services retail banking sector inquiry, 2005-2006
It should be emphasised that longevity measures the average age of existing active current accounts; not their expected lifetime. We have two reasons to believe that the expected lifetime of these accounts is significantly higher than their current 'longevity'. Firstly and evidently, most accounts currently open will remain to be open for some time in the future.153 Secondly, an estimate of the expected lifetime of current accounts could be deduced from the churn measure used in the inquiry. One could take the average yearly consumer churn of 7.8% and control it with 1.2-2.4% for demography (see below).
153 We may draw a parallel to the relationship between average age and expected lifetime in a given
If in one year between 5.4% and 6.6% of bank customers switch service provider, than all customers switch on average in every 15-18 years. The inquiry’s estimates on the length of existing current account relationships could not control for the effects of market growth, therefore in countries where the proportion of new accounts are higher, as in the New Member States, the difference between the expected lifetime of current accounts and current longevity figures could be significantly higher than in other member states.154
Demography was a known factor increasing the churn indicator, and was also not controlled for. Basically, the churn rate overestimated the rate of customers moving accounts by the average of birth and death rates. This figure is estimated to fall between 1.2% and 2.4% in different countries for consumers; and between 5.6% and 13.6% for SMEs.155 SME demography figures are higher in new member states, a pattern that is also observable in the churn statistics. Some part of consumer switching takes place due to changes in life situations, e.g. new job, move, marriage. There is no comparative data on EU25 regarding this element either.
The extent of cross-selling in retail banking
The degree of cross-selling in an industry is often perceived as an indicator of the competitive structure of a market. Retail banking is a multi-product activity. Customers often consume from a single bank a wide range of financial products including current accounts, mortgages, deposits, credit cards, insurance, and other financial products. Customers can very well be purchasing multiple products from a single provider due to the existence of economies of scope that allow the customer to reach a higher level of satisfaction from concentrating its purchases.
Cross-selling can be measured as the average number of products that customers purchasing a specific product are altogether purchasing from the same bank. This specific product line used as a reference is called the “hook” product. Figure 18 reports country level weighted cross-selling averages with respect to several hook products, for customers and SMEs respectively.
154 See for example the low figures reported in Latvia, Slovakia and even Greece, where a large proportion
of newly opened accounts produces a low average longevity.
155Eurostat Yearbook 2005, 2003 data
http://epp.eurostat.ec.europa.eu/portal/page?_pageid=1334,49092079,1334_49092794&_dad=portal&_sc hema=PORTAL
Figure 18
Cross-selling ratio. Weighted average1. Year 2005.
CONSUMERS current accounts Hook product: deposit accounts Hook product: Hook product: mortgages productsAll hook 2
EU-15 average3 2.24 1.86 3.07 2.07
NMS average3 1.62 1.54 2.45 1.58
EU-225 average3 2.14 1.81 2.97 1.99
SMEs current accounts Hook product: Hook product: loans
Hook product: credit lines /overdrafts All hook products EU-15 average3 2.15 2.88 3.12 2.42 NMS average3 1.34 2.46 2.59 1.51 EU-225 average3 2.02 2.81 3.03 2.27
Notes: 1 Banks weight: consumer cross-selling
2 Ratio of the sum of all cross-sold products to the sum of all hook products 3 The estimates for EU-15, New Member States and EU-25 are country-level
averages weighted by population.
Source: Commission services retail banking sector inquiry, 2005-2006
Mortgages are the hook product that link to a higher consumption of other products in every country for retail consumers. On average, in the EU25 a consumer taking a mortgage from a financial institution consumes 2.97 products altogether. The average number of products consumed by SMEs tends to be higher than for individual consumers. Credit lines are the most effective hook product among SMEs. Loans are also a very effective form of cross-selling to SMEs. On average, an SME consumes altogether 2.81 products from a bank which offers her a loan. Cross-selling also differs largely across countries and tends to be lower in the New Member States.
The practice of multi-banking by customers
There is evidence that customers opening new current account do not always immediately close their old one. ECB data suggest156 that in several Member States there are more active current accounts than inhabitants. The same data also suggest that in the UK and Finland there are around two current accounts per capita. This points at the growing trend of multi-banking: having parallel accounts at different institutions. The choice of customers to maintain more than one current account will be influenced by the cost structure set by banks in that market. In some Member States, maintaining a current account is free (i.e. there are no account management fees) and therefore many customers who change banks decide to keep their old current account, at least for a substantial period. In other Member States, however, account management fees are substantial and comprise a significant share of banks’ revenues from current accounts. Chapter A.5 reports, using 2004 data, that several banks in Italy charged annual account management fees of €90 per year. This type of price structure clearly raises the cost of multi-banking by customers and reduces the number of accounts held by customers. 157
A common response from banks in the public consultation was that theinquiry’s analysis of customer mobility failed to capture the effect of multi-banking, and that its positive effects on competition were significant in some markets. In fact, multi-banking appeared in the Commission’s data as a contribution to overall market growth. Interim Report II
156ECB Blue Book Addendum incorporating 2003 figures, August 2005, page 10.
157 High account management fees in Italy have a pronounced effect on the consumption patterns of
customers. According to ECB data, Italian customers hold only 0.63 current accounts per head; the lowest ratio in the EU15. Joint accounts are common in Italy; perhaps partly to spread the cost of high account management fees.
presented churning rates for 2005, before and after controlling for overall market growth. Weighted current account market growth rates in 2005 – including the effect of increasing multi-banking type of mobility – were 2.42% for consumers158 and 1.72% for SMEs. Much of this overall growth will result from demographic change or increasing market penetration. It cannot be excluded that in some Member States in particular, the spread of multi-banking may significantly increase competition. However, across Europe it appears to play at most a modest role.
A.6.4. Empirical relationship between customer mobility and market