October 2015 – Page 2 – Digital Finance Analytics (DFA) Blog

Amex Holders First To Use Apple Pay In Australia

As reported by the tech blog 9to5Mac, Apple has just announced that its mobile payments service, Apple Pay, will be available to American Express users in Australia and Canada in 2015 and Spain, Singapore and Hong Kong in 2016.

Apple chief Tim Cook said that Apple Pay would be made available only to “eligible American Express customers in these regions”, represent a reduced roll out compared with users in the UK or the US. The Australian deployment will bring the total number of Apple Pay markets to four.

Apple Pay’s mobile payment and digital wallet offering allows users to make payments with their iOS devices, including Apple Watch. At its US launch Apple said more than 1 million credit cards had been registered on Apple Pay in its first three days of availability.

CPI September quarter 2015 rises 0.5 per cent

The latest Australian Bureau of Statistics (ABS) figures show the Consumer Price Index (CPI) rose 0.5 per cent in the September quarter 2015, following a rise of 0.7 per cent in the June quarter 2015.

The most significant price rises this quarter were in international holiday travel and accommodation (+4.6 per cent), fruit (+8.2 per cent) and property rates and charges (+4.6 per cent), These rises were partially offset by falls in vegetables (–5.9 per cent), telecommunication equipment and services (–2.0 per cent) and automotive fuel (–1.7 per cent).

The CPI rose 1.5 per cent through the year to the September quarter 2015, following a rise of 1.5 per cent through the year to the June quarter 2015.

Underlying inflation, using the mean trimmed data, is still within the RBA 2-3% target band, so there is no reason to expect an interest rate cut on this measure in November.

NAB Full Year Results to 30 Sept 2015 Below Expectations

NAB released their full year results today, which were below expectation, thanks to specific provisions to cover UK issues, lower net margin, and exchange rate movements. This despite a reduction in bad debt provisions by 14 basis points. The final dividend is 99 cents per share (cps) fully franked, unchanged from the 2015 interim and 2014 final dividends. This is a return on capital employed of 13.8%, which is 5% lower than CBA, the most profitable Australian bank.

However, once NAB gets rid of their UK problems, and focusses on the local market, it has the potential to leverage its franchise and up the ante. By tackling the capital issues aggressively, it has laid strong foundations.

Cash earnings were $5.84 billion, an increase of $0.78 billion or 15.5%. Analysts were expecting more than $6.2bn. In 2013 they reported a record $5.94bn. There are a large number of moving parts in the Group.

Excluding specified items, the increase was 2.4% over the year and 2.8% compared to the March 2015 half year. On a statutory basis, net profit attributable to the owners of the Company was $6.34 billion, an increase of $1.04 billion or 19.7%. Excluding discontinued operations, statutory net profit increased 22.7% to $6.36 billion. The main difference between statutory and cash earnings over the year relates to the effects of fair value and hedge ineffectiveness.

Revenue increased approximately 4%. Excluding gains from a legal settlement and the UK Commercial Real Estate loan portfolio sale and SGA asset sales, revenue rose approximately 3%, benefitting from higher lending balances, stronger Markets and Treasury income, increased NAB Wealth net income, and the impact of foreign exchange rates. Group net interest margin (NIM) declined 4 basis points, mainly due to competition for business lending.

Expenses fell approximately 1%, but excluding specified items and foreign exchange rate impacts rose approximately 4%. Key drivers include investment in the Group’s priority customer segments, increased technology costs, higher UK spend associated with preparing for separation, combined with wage increases.

Improved asset quality resulted in a total charge for Bad and Doubtful Debts (B&DDs) of $823 million, down approximately 5% due to lower charges in Australian Banking and UK Banking. The charge includes a collective provision overlay of $102 million for Australian agriculture and resource sectors, and an increase in New Zealand collective provision charges of NZ$78 million predominantly relating to the dairy sector.

The Group’s Common Equity Tier 1 (CET1) ratio was 10.2% as at 30 September 2015, an increase of 137 basis points from March 2015 mainly reflecting the rights issue proceeds. The Group’s CET1 target ratio remains between 8.75% – 9.25%, based on current regulatory requirements. The CET1 ratio at 30 September 2015 is above the target range reflecting regulatory increases in mortgage risk weights from 2016 and the intended UK demerger.

The impact of recent capital raisings on the capital ratios are clear. The bank is now well positioned, and one of the strongest positioned in the world.

The Group maintains a well diversified funding profile and has raised approximately $26.5 billion of term wholesale funding in the 2015 financial year. The weighted average term to maturity of the funds raised by the Group over the 2015 financial year was 4.7 years. The stable funding index was 92.3% at 30 September 2015, 1.9 percentage points higher than at 30 September 2014. The Group’s quarterly average liquidity coverage ratio as at 30 September 2015 was 115%.

Sale of Life Insurance Business

NAB announced an agreement to sell 80% of NAB Wealth’s life insurance business to Japanese insurer Nippon Life Insurance Company (Nippon Life) for $2.4 billion. This transaction is separate and in addition to the life reinsurance transaction finalised in July 2015. As part of the partnership NAB will enter a 20 year distribution agreement to provide life insurance products through its owned and aligned distribution networks.

NAB will retain existing ownership of its investments business which includes superannuation, platforms, advice and asset management. The transaction will occur through the sale of 80% of MLC Limited after the extraction of NAB’s superannuation and investments business and certain other restructuring steps. NAB will retain the MLC brand, although it will be licensed for use by the life insurance business for 10 years, and will continue to be applied as is currently the case in our superannuation, investments and advice business. The transaction is expected to be completed by the second half of calendar 2016 subject to certain conditions including regulatory approvals, establishment of the life insurance business as a standalone entity, extraction of the superannuation business from MLC Limited and the finalisation of certain agreements. NAB will retain responsibility for managing the life insurance business until completion.

The transaction is expected to result in an indicative loss on sale of approximately $1.1 billion inclusive of transaction and separation costs, based on expected completion life insurance net assets of $3.6 billion including $1.6 billion of allocated goodwill. In addition, NAB’s pro forma FY15 CET1 ratio is expected to increase by approximately 50 basis points after allowing for transaction and separation costs, with this increased capital expected to be retained by NAB to meet potential increased regulatory capital requirements. One off post-tax costs of approximately $440 million are expected to be incurred by NAB relating to separation, and the extraction and simplification of the superannuation business.

UK Demerger

The Group has announced its intention to divest CYBG PLC (CYBG), through a demerger and Initial Public Offering (IPO), in early February 2016. Significant progress has been made on the proposed transaction, including advanced engagement with key regulators and listing authorities in both jurisdictions.

The Group’s intention is to pursue a demerger of approximately 75% of CYBG to NAB shareholders and a sale of the balance by way of IPO (up to approximately 25%) to institutional investors. It is proposed that CYBG will have a primary listing on the London Stock Exchange (LSE) and a CHESS Depositary Interest (CDI) listing on the Australian Securities Exchange (ASX).

The proposed demerger and IPO remains subject to a range of matters, including various court and regulatory approvals and NAB shareholder approval. Shareholder approval will be sought at a meeting expected to be in late January 2016.

As announced at the third quarter trading update on 10 August 2015, additional conduct provisions were expected to be required at the Full Year 2015 results in relation to both payment protection insurance (PPI) and interest rate hedging product (IRHP) costs.

These additional provisions have now been determined and comprise the following:

Provisions of £390 million (£323 million or A$704 million after tax) in relation to PPI reflecting the impact of the past business review and the consequent need to undertake further proactive customer contact, as well as costs to run the remediation program
Provisions of £75 million (£63 million or A$135 million after tax) in relation to interest rate hedging products and fixed rate tailored business loans based on additional expected claims

As announced at the March 2015 Half Year results, in order to achieve the proposed CYBG demerger and IPO the UK PRA requires capital support for CYBG of £1.7 billion in relation to potential future legacy conduct costs. The provisions of £465 million recognised in the September 2015 half year will form part of the £1.7 billion support package and, combined with £120 million for CYBG’s share of future conduct liabilities, will result in a capped indemnity from NAB of £1.115 billion upon separation. Assuming no further pre-demerger provisions are raised, future legacy conduct costs will be shared 90.3%/9.7% between NAB and CYBG respectively.

On completion of the demerger, the capped indemnity amount of £1.115 billion is expected to result in a deduction from NAB’s CET1. To the extent that claims against NAB under the capped indemnity are ultimately less than £1.115 billion, this is expected to result in a commensurate CET1 benefit for NAB.

Group asset quality metrics continued to improve over the period. The ratio of Group 90+ days past due and gross impaired assets to gross loans and acceptances of 0.71% at 30 September 2015 was 14 basis points lower compared to 31 March 2015 and 48 basis points lower compared to 30 September 2014.

The ratio of collective provision to credit risk weighted assets was 1.01% unchanged from 31 March 2015. The ratio of specific provisions to impaired assets was 32.7% at 30 September 2015 compared to 36.0% at 31 March 2015.

Segmentals

Australian Banking cash earnings were $5,111 million, an increase of 3% reflecting higher revenue and lower B&DD charges. Revenue rose 4% benefitting from stronger Markets and Treasury performance combined with higher volumes of housing and business lending while NIM declined 3 basis points as a result of lending competition. Expenses rose 6% or 5% excluding the impact of changes in foreign exchange rates, with investment in front line banker roles in priority customer segments combined with higher project costs, partly offset by productivity savings. Asset quality metrics continued to improve and B&DD charges of $665 million fell 10% over the year and 18% over the March 2015 half year. This largely reflects lower new impaired loans, and is despite higher collective provision charges including a $102 million overlay for the agriculture and resource sectors.

Looking at housing in particular, net margin is unchanged, and the impact of recent loan classifications are visible.

Loss rates are down in September 2015.

NAB says they will be within the 10% APRA speed limit for investment home loans.

NAB Wealth cash earnings increased 27% to $464 million benefitting from stronger insurance income and stable costs. Net income rose 10% reflecting higher premium pricing, improved insurance lapses and claims, and non-recurrence of insurance reserve strengthening in the prior year. While funds under management rose 8% with strong investment markets and the acquisition of Orchard Street Investment Management in the March 2015 half year, this was offset by lower IoRE and lower investment margins mainly due to MySuper plan transitions and business mix changes.

NZ Banking local currency cash earnings of $823 million rose 2% over the year. Good underlying profit growth was partly offset by higher collective provision charges in the September 2015 half year predominantly relating to the dairy sector. Revenue rose 4% with improved lending volumes and higher margins. Cost growth was contained to 2%, while still investing in staff and technology to support the Auckland focused growth strategy.

UK Banking local currency cash earnings of £156 million were broadly flat. Mortgage volume growth and a halving of B&DD charges to £38 million reflecting asset quality improvements, were more than offset by higher costs particularly in the September 2015 half year, and lower margins. Costs rose 7% reflecting investment in the franchise and the impact of pre separation activities, which were partly offset by a one-off pension scheme gain.

Woolies’ new loyalty program offers a glimpse into the future

From The Conversation.

Woolworths is set to launch its new loyalty program, Woolworths Rewards, claiming that the new scheme will enable shoppers to redeem cash discounts off their shopping basket, much faster than ever before.

It is estimated shoppers will acquire the necessary points to save $10 automatically of their grocery bill within seven weeks.

Resembling the model used by UK retailer Morrisons, the new Woolworths Rewards program is a smart move for the retailer hoping to claw back some market share and curtail operational costs. However, there is no such thing as a free lunch.

While it will remove the costs of maintaining the Qantas-Woolworths relationship, estimated to be around AUS$80 million a year and allow them to re-invest at least AUS$65 million into stores, it may force shoppers into “brand switching” behaviour.

Interestingly, shoppers will only accrue points toward their $10 savings on selected ticketed items. Hence, the cost of maintaining the program will be met by suppliers who elect to have their brands featured with the big orange ticket. This is simply a way of moving supplier funded promotional allowances into a loyalty program, rather than a direct price discount.

Commentators have often voiced concern about the power of our supermarkets in encouraging us to purchase one brand, over another brand. When faced with the prospect of purchasing Brand A which attracts “Woolworths Dollars” versus Brand B, that doesn’t, it’s most likely shoppers will purchase Brand A. It is expected that shoppers may be critical of being forced into a brand switching situation to attain “Woolworths Dollars”.

Customers tiring of points loyalty programs

The larger issue facing Woolworths and others is there is no exclusivity when every supermarket, department store, dress shop and coffee cart offers you a membership card. As a result, shoppers grown tired of endlessly collecting points to eventually redeem on gifts, discounts or possibly a flight. Studies show that a third of members never redeem points.

Retailers imbedded loyalty programs to encourage repeat shopping, protect themselves from price wars and most importantly collect valuable shopping data. The first retailer in Australia to offer a loyalty program was Fly Buys, a joint venture between Coles Myer (now Wesfarmers) and Loyalty Pacific, 20 years ago.

Then, shoppers were quick to sign up, with the promise of “free” flights in return for their loyalty and of course their valuable personal shopping data, which included brands purchased, location, frequency and demographics.

Back then, the only way retailers could accurately track and target shoppers was through loyalty card usage, and while this still happens today, retailers have other more efficient channels, such as linked credit cards, like Coles Credit Card (Mastercard) and Woolworths Money (Visa).

As shoppers are more frequently “tapping and going”, retailers can now access a wider range of data, outside of simply their loyalty program members. Such programs also allowed retailers to distract shoppers from focusing on price by simply getting shoppers to focus on the ‘prize’ than the price.

Need for speed

Points fatigue occurs when shoppers are faced with months, if not years, of collecting points to ultimately redeem on a desired item or reach that elusive gold or platinum level. Today, shoppers are seeking immediacy and customisation.

Recently, Morrisons moved away from its complex “price match” loyalty scheme to a more simplified program where shoppers now earn five loyalty points for every £1 they spend.

Once a shopper earns 5,000 points they immediately to receive a £5 voucher. Other retailers are also moving away from long-term points accruing programs to deliver instant and non-monetary rewards to shoppers, such as free newspapers or coffee.

The UK’s Waitrose recently re-launched their loyalty program of “pick your own offers”, where shoppers can choose from a list of 1000 relevant products and immediately save 20%. Over time, the list changes, and shoppers get to select new products. The scheme has seen more than 850,000 shoppers sign up.

Non-monetary loyalty

The other problem with existing loyalty programs is that retailers have confused “loyalty” with “rewards”. Loyal shoppers will always consider their favourite brands and stores first and frequent them consistently. True loyalty programs should also strengthen the relationship between the retailer and customer.

UK retailer Marks and Spencer recently moved away from their strictly points-based shopping frequency scheme to reward shoppers for other positive behaviours, such as completing online surveys, writing online reviews or referring friends.

The program of “non-monetary” rewards – such as invitations to exclusive food and drink master-classes or fashion parades – demonstrates shoppers are seeking more than just generic deals and discounts. The program also allows M&S to demonstrate its corporate social responsibility credentials, with shoppers earning “sparks” points for donating unused clothing when purchasing new outfits, termed “shwopping”.

The future: Big brother is watching

What is the future of loyalty? While we see retailers around the world actively move away from long-term, points based schemes to programs that offer immediate gratification and non-monetary rewards, the next frontier will be instant customised offers.

Already, French retailer Carrefour and US retailer Macys have begun using Near Frequency Communications (CFC), which “pushes” targeted offers to their shoppers while they are in-store, or nearby.

It is expected that the opt-in technology would be the natural evolution of loyalty programs, where members receive immediate and customised offers based on where they are standing and what they are looking at within a store.

Author: Gary Mortimer, Senior Lecturer, QUT Business School, Queensland University of Technology

NAB In Trading Halt

The securities of National Australia Bank Limited will be placed in Trading Halt Session State at the request of the Company, pending the release of an announcement by the Company.

The securities will remain in Trading Halt Session State until the commencement of normal trading on Thursday, 29 October 2015.

It will most likely be the sale of a non-core business, releasing capital, as part of NAB’s balance sheet build. Speculation is that it may related to the potential sale of NAB’s life insurance business.

Esanda compensates consumers for conduct by finance broker

ASIC says that following an ASIC investigation of Get Approved Finance, a West Australian car finance provider, Esanda has agreed to compensate more than 70 borrowers for car loans organised by Get Approved Finance.

ASIC’s investigation found that between 2011 and 2014, over 15 brokers employed by Get Approved Finance engaged in unfair conduct by having Esanda approve loans for consumers with poor credit histories, who otherwise did not meet Esanda’s lending criteria. The brokers arranged for a friend or relative of the consumer to become the nominated borrower, instead of the consumer who was not eligible for credit. They did this by misleading the friend or relative about the effect of the documents they were signing, for example, by stating they were a guarantor rather than the borrower.

The Get Approved Finance brokers also sold add-on products (such as insurance or warranties), on behalf of various insurers, to some borrowers without their knowledge or consent. The additional premiums increased the amount borrowed and therefore the risk of borrowers defaulting. In one case, the consumer was sold add-on products costing more than $15,000, increasing the amount borrowed from around $24,000 to over $39,000.

The total value of the loans financed was more than $1.38 million, with some loans approved of over $50,000.

Get Approved Finance was able to earn commissions from both Esanda and the providers of the add-on products that would have been lost if Esanda had rejected the applications for credit. ASIC was concerned that Esanda did not have systems in place to manage the risks created by these commission payments or to effectively identify the serious misconduct by the Get Approved Finance brokers, given that it continued for over two years.

Esanda is a division of Australia and New Zealand Banking Group Ltd.

West Australian-based finance broker, Jeremy (WA) Pty Ltd, trades as Get Approved Finance.

ASIC Says High-Frequency Trading and Dark Liquidity Is OK

High-frequency trading and dark liquidity have been two of the most topical market structure issues globally over recent years. During 2015, ASIC have undertaken two new reviews of high-frequency trading and dark liquidity. The aim of these reviews has been to update and build on their earlier analysis of equity markets and to assess the effect of high-frequency trading on the futures market.

No further regulation specifically addressing high-frequency trading or dark liquidity is proposed at this stage but ASIC says they will continue to monitor developments involving these and other markets issues.

The 2015 reviews involved:

(a) stakeholder engagement, including over 40 meetings with fund managers, market participants, high-frequency traders and market operators. Over 20 separate meetings on principal trading and facilitation with market participants, fund managers and overseas regulators;
(b) in-depth analysis of equity and futures order and trade data; and
(c) literature review, including research by academics and other regulators

High frequency trades make up more than 30% of all trades, and dark turnover is sitting at about 12%.

ASIC’s Key Findings

High Frequency Trading – Equity Markets

The level of high-frequency trading in our equity markets is reasonably steady at 27% of total turnover (this is comparable to Canada, the European Union and Japan).
However, the concentration of high-frequency trading in our markets is higher, with 30% fewer high-frequency trading accounts. Trading is also more active in mid-tier securities than in 2012.
High-frequency traders are trading somewhat more aggressively than in 2012, while still contributing significantly to the orders at the best displayed prices. Average holding time is between 50 and 60 minutes.
High-frequency traders appear to have become more sophisticated. Compared to 2012, they are better at avoiding interacting with one another and they are extracting larger gross trading revenues. ASIC estimate that they earned $110–180 million in aggregate over the 12 months to 31 March 2015. This translates to a cost of 0.7 to 1.1 basis points to other market users. This is material, but substantially less than other figures suggested by some, and less than some other trading costs (e.g. average bid–offer spreads are 13 basis points).
High-frequency trading does not appear to be a key driver of transaction costs. It appears that higher levels of high-frequency trading assist in lowering transaction costs for low turnover securities.
Some concerns about predatory trading remain (i.e. where trading is undertaken to exploit others or unfairly induce them to trade). While not excessive in our markets, predatory trading can adversely affect the trading outcomes for fundamental investors (those who buy or sell on an assessment of intrinsic value). Fundamental investors remain ASIC’s regulatory priority and unchecked predatory trading can undermine our objectives for those investors to have confidence and trust in our markets and for our markets to be fair, orderly, transparent and efficient.

High Frequency Trading – Futures market

High-frequency trading has grown rapidly in the futures market (130% since December 2013), although from previously low levels. High-frequency trading in the S&P/ASX 200 Index Futures Contract (SPI) accounts for 21% of traded volume and in the Three Year and Ten Year Commonwealth Treasury Bond Futures Contracts (bond futures) it accounts for 14% of traded volume. While these levels do not currently concern ASIC, they are closely monitoring growth
ASIC are conducting inquiries into a number of traders for excessive order entry and cancellation in the ASX 24 market during the quarterly expiries (i.e. the ‘roll’). This practice affects other market users because it prevents the prioritisation of their orders and forces them to cross the spread (i.e. pay more). ASIC has asked ASX to consider what steps may be taken to discourage this practice.

Dark liquidity

There has been a partial shift back to using dark liquidity for its original purpose, namely large block trades to reduce market impact. This is a positive development and, in part, a response to the lowering of block trade thresholds in May 2013
Many of the concerning trends with crossings systems that ASIC identified in 2012 have abated. The reasons for this are likely due to buy-side clients demanding improved standards and ASIC market integrity rules introduced to enhance fairness and improve transparency around the operation of crossing systems
There has been a decline in the use of crossing systems and growth in the use of the exchange dark venues (i.e. ASX Centre Point and Chi-X hidden orders). This is likely a response to the trade with price improvement rule introduced in May 2013, and a lack of price improvement opportunities in crossing systems
There is a trend here and overseas toward exchange and crossing system operators seeking to preference some market users over others (e.g. better or worse order execution priority) for dark trading. These developments have the potential to undermine fair and non-discriminatory trading and may be inconsistent with operators’ obligations. ASIC is unlikely to support any form of preferencing where it unduly favours some market users over others, unfairly limits access to market facilities, or otherwise results in the unfair treatment of orders or market users
ASIC has concerns about how some market participants are managing their conflicts of interest for principal trading and client facilitation. Market participants should review their arrangements to protect clients’ trading intentions, manage conflicts of interest, avoid the risks of insider trading, conduct compliance and supervision and have appropriate incentive structures. They should avoid situations where staff are responsible for the participant’s own trading while having access to unexecuted client orders. Additional controls, including physical separation, should be put in place to manage the conflicts and conduct risk arising from active facilitation

We think high frequency trading is of concern, because it is clear, those who invest in major IT systems to reduce transaction times have significant market advantage – it has become an arms race, where smaller players cannot win. The system is essentially gamed.

NAB changes debt collection practices following concerns by ASIC

According to ASIC, National Australia Bank (NAB) has made changes to its debt collection practices following ASIC concerns that some of NAB’s collection letters may have been misleading, deceptive or unconscionable.

ASIC was concerned that NAB was sending debt collection letters to customers using letterheads for “Fairhalsen Collections” and “Brunswick Collections Services”, which may have given the incorrect impression that NAB had sold, outsourced or otherwise escalated a debt when this was not the case. These letters only disclosed that the entity was a division of NAB in fine print at the bottom of the page.

ASIC was also concerned that letters sent to some customers during the collection process stated that if the debt was not paid, or contact made:

legal proceedings for recovery of the entire debt might commence without further notice and that such proceedings could result in a judgment being entered and/ or bankruptcy;
a debt collector might visit the customer’s home to collect the debt; or
NAB might use any other legal action necessary to collect the debt.

In fact, for the majority of recipients, such action was either unlikely or would only be considered at a later stage in the collection process.

In response to ASIC’s concerns NAB has removed from its collection letters:

references to Fairhalsen Collections and Brunswick Collection Services
representations in relation to face-to-face contact, legal action and bankruptcy (unless such action is likely to occur).

ASIC Deputy Chairman Peter Kell said, ‘Creditors and collectors are entitled to accurately explain the consequences of non-payment of a debt, but the consequences must not be misrepresented or overstated. The threat of legal proceedings and bankruptcy can be very stressful. Collectors must not threaten legal action if such action is not possible, not intended, or not under consideration.’

CMA Proposes Better Deal for UK Bank Customers

Banks must address long-term problems and make it easier for customers to take charge of their accounts, the UK’s Competition and Markets Authority (CMA) stated this week.

Publishing its provisional findings as part of an in-depth investigation into the £16 billion current account and business banking sectors, the CMA has found that banks do not have to work hard enough to compete for customers.

The investigation has identified a number of competition problems in both the personal current account (PCA) and small and medium-sized enterprise (SME) banking markets. Low levels of customer switching mean that banks are not put under enough competitive pressure, and new products and new banks do not attract customers quickly enough. There is a particular problem in SME banking where many SMEs open their business current accounts (BCA) at the same bank where they have their PCA, then stick with that bank for their business loans.

57% of consumers have been with their PCA provider for more than 10 years, and 37% for more than 20 years. Customers with current accounts are faced with complex overdraft charges and limited information on product and service quality, which, along with limited effective comparison tools, makes it very difficult for customers to know what they are paying and to compare banks and products.

Bank customers fear that switching their current account to a new bank will be complicated, time-consuming and risky. The Current Account Switch Service (CASS) was set up to make the process easier and is functioning reasonably well, but awareness and confidence remain low. Only 3% of customers switched their PCA in 2014 and just 16% looked at alternative accounts.

The CMA found that overdraft users are even less likely to switch PCAs than other users. Heavy overdraft users, in particular, could save up to £260 a year if they switched. On average, current account users could save £70 a year by switching.

The investigation also discovered that accounts which are more expensive and below average quality are not losing customers to cheaper and better alternatives at the rate that would be expected in a well-functioning market.

The lack of competitive pressure in SME banking is highlighted by the fact that more than 50% of start-ups looking for a SME account choose the bank with which they have a personal current account, over 90% stay with their BCA when the initial free banking period comes to an end, and around 90% then go to their BCA provider when they are looking for business loans.

As in the case of PCAs, the opening and/or switching process is seen to be time-consuming, and at risk of things going wrong. SME charging structures are complex and difficult to compare, there are no service quality measures to aid comparison and there are limited effective price comparison tools for SMEs.

The CMA investigation did find a number of positive developments: new entrants into both PCA and SME banking, innovative products becoming available, the digital innovations associated with online and mobile banking, and new tools like Midata and CASS, which have the potential to increase searching and switching.

Despite these encouraging developments, because too few customers are switching, banks do not have strong enough incentives to work hard to compete for customers through better products or cheaper prices, and smaller or better banks find it hard to gain a foothold.

The CMA has published an initial list of remedies, which sets out possible measures aimed at addressing these issues by increasing competition and securing a better deal for customers. It will develop these proposals over the coming months. It is important that any new remedies are really effective, so the CMA will be testing its proposals carefully.

Potential remedies include:

Requiring banks to prompt customers to review the service they receive from their bank through receiving individual messages at certain ‘trigger points’. These trigger points could include a loss of service, closure of their local branch, unarranged overdraft charges or a change in the terms and conditions of their account. In the case of SMEs a key trigger point could come at the end of free banking periods.
Making it easier for consumers and businesses to compare bank products by upgrading Midata, an industry online tool, launched with the support of government, that gives consumers access to their banking history at the touch of a button. Midata allows consumers to easily access their banking data from their bank and input it directly into a price comparison website which can then analyse their transactions, and alert them to available bank accounts which best suit their needs. An improved Midata could have a radical impact on consumer choice in retail banking markets.
Requiring the creation of a new price comparison website for SMEs – currently nothing effective exists to fulfil this role.
Requiring banks to help raise public awareness of, and confidence in, switching bank accounts, through increasing their funding for a widespread and sustained advertising campaign promoting CASS and improving the service it offers.
Requiring better sharing of information with credit reference agencies, banks and financial advisers – making it easier for SMEs to shop around for loans and cutting out the need for multiple application form filling.

The CMA provisionally decided not to recommend remedies aimed at ending free if-in-credit (FIIC) accounts as it saw no convincing evidence that the prevalence of the FIIC model distorted competition, noted that some banks have already devised accounts which compete with FIIC through the rewards they offer, and also noted that FIIC accounts give a reasonable deal to many customers.

Structural remedies, such as forcing the break-up of banks, were also provisionally rejected as it was decided that they were not likely to be effective in addressing the competition concerns found. The problems in the market are unlikely to be resolved by creating more, smaller banks; it is the underlying issue of lack of switching which has to be addressed.

Alasdair Smith, Chairman of the retail banking investigation, said:

Banking is a sector of huge importance that affects every household and business in the country.

We think customers need to be put in charge of their banking.

There have been long-standing concerns about the retail banking market, where many customers could save money and get better services by switching accounts. This investigation was an opportunity to take a detailed and independent look at the sector.

Despite some encouraging developments, particularly in the shape of challengers that have entered the market in recent years, for too long banks have been able to sit back and take their existing customers for granted.

We don’t think that customers will truly benefit from a more competitive marketplace until they can compare accounts more easily and feel confident that they can switch without risk, and that is why our provisional remedies are aimed at giving customers control.

We are considering a series of measures that will have a far-reaching impact on how banks operate and will empower account-holders to search for and switch to the account that suits them.

The investigation is looking separately at Northern Ireland, but has made the same findings for Northern Ireland as it has for Great Britain.

The full provisional findings report along with over 30 appendices will be published later next week. The CMA will now consult and hold detailed discussions with all interested parties on the findings and possible remedies ahead of publishing its final report in May 2016. The CMA is also reviewing measures put in place by its predecessor body, the Competition Commission, in 2002 and 2008, to remedy concerns in the SME banking and Northern Ireland personal current account sectors.

How big data and The Sims are helping us to build the cities of the future

From The Conversation.

By 2050, the United Nations predicts that around 66% of the world’s population will be living in urban areas. It is expected that the greatest expansion will take place in developing regions such as Africa and Asia. Cities in these parts will be challenged to meet the needs of their residents, and provide sufficient housing, energy, waste disposal, healthcare, transportation, education and employment.

So, understanding how cities will grow – and how we can make them smarter and more sustainable along the way – is a high priority among researchers and governments the world over. We need to get to grips with the inner mechanisms of cities, if we’re to engineer them for the future. Fortunately, there are tools to help us do this. And even better, using them is a bit like playing SimCity.

A whole new (simulated) world

Cities are complex systems. Increasingly, scientists studying cities have gone from thinking about “cities as machines”, to approaching “cities as organisms”. Viewing cities as complex, adaptive organisms – similar to natural systems like termite mounds or slime mould colonies – allows us to gain unique insights into their inner workings. Here’s how.

Complex organisms are characterised by individual units that can be driven by a small number of simple rules. As these relatively simple things live and behave, the culmination of all their individual interactions and behaviours generate more widespread aggregate phenomena. For example, the beautiful and complex patterns made by flocking birds are not organised by a leader. They come about because each bird follows some very simple rules about how close to get to each other, which direction to fly in, and how to avoid predators.

Similarly, ant colonies can exhibit very sophisticated and seemingly intelligent behaviour. But this sophistication doesn’t come about as a result of a good leader. It is the result of lots of ants following relatively simple rules, without any regard for the bigger picture. It is easy to see how this perspective could be applied to human systems to explain phenomena like traffic jams.

So, if cities are like organisms, it follows that we should examine them from the bottom-up, and seek to understand how unexpected large-scale phenomena emerge from individual-level interactions. Specifically, we can simulate how the behaviour of individual “agents” – whether they are people, households, or organisations – affect the urban environment, using a set of techniques known as “agent-based modelling”.

Using The Sims to build your own city. haljackey/Flickr, CC BY

This is where it gets a bit like SimCity. It’s apt that the computer game was originally based on the work of Jay Forrester, a world-renowned system scientist with an interest in urban dynamics. In the game, individual agents are given their own characteristics and rules, and allowed to interact with other agents and the environment. Different behaviour emerges through these interactions and drives the next set of interactions.

But while computer games can use generalisations about how people and organisations behave, researchers have to mine available data sets to construct realistic and robust rule sets, which can be rigorously tested and evaluated. To do this effectively, we need lots of data at the individual level.

Modelling from big data

These days, increases in computing power and the proliferation of big data give agent-based modelling unprecedented power and scope. One of the most exciting developments is the potential to incorporate people’s thoughts and behaviours. In doing so, we can begin to model the impacts of people’s choices on present circumstances, and the future.

For example, we might want to know how changes to the road layout might affect crime rates in certain areas. By modelling the activities of individuals who might try to commit a crime, we can see how altering the urban environment influences how people move around the city, the types of houses that they become aware of, and consequently which places have the greatest risk of becoming the targets of burglary.

To fully realise the goal of simulating cities in this way, models need a huge amount of data. For example, to model the daily flow of people around a city, we need to know what kinds of things people spend their time doing, where they do them, who they do them with, and what drives their behaviour.

Without good-quality, high-resolution data, we have no way of knowing whether our models are producing realistic results. Big data could offer researchers a wealth of information to meet these twin needs. The kinds of data that are exciting urban modellers include:

Electronic travel cards that tell us how people move around a city.
Twitter messages that provide insight into what people are doing and thinking.
The density of mobile telephones that hint at the presence of crowds.
Loyalty and credit-card transactions to understand consumer behaviour.
Participatory mapping of hitherto unknown urban spaces, such as Open Street Map.

These data can often be refined to the level of a single person. As a result, models of urban phenomena no longer need to rely on assumptions about the population as a whole – they can be tailored to capture the diversity of a city full of individuals, who often think and behave differently from one another.

Missing people

There are, of course, serious practical and ethical considerations to take into account, when integrating big data into urban models. The volume of background noise in new data sources can make it difficult to extract useful and reliable information. For example, it can often be difficult to distinguish Twitter messages posted by bots from those by real people.

Some of us still do things the old-fashioned way. from www.shutterstock.com

We must also make sure that we understand who is well-represented in our data, and who is not. The digital divide is alive and well and research suggests a class divide separating those who do and do not produce digital content. This means that there are probably large sections of the population missing from data sets.

We also need to find new ways of making these methods ethical. Traditionally, consumer and research ethics have been structured around informed consent. Before taking part in interviews or surveys, participants need to sign consent forms that give the researchers permission to use their data. But now, individuals are digitising aspects of their lives such as moods, thoughts, feelings, and behaviours that have historically gone undocumented. And, importantly, these are often released publicly on the internet.

And while an individual might have ticked a box that gives permission for their data to be used, that’s no guarantee that they’ve read and understood the terms. iTunes’ June 2015 terms and conditions, for example, are more than 20,000 words long (20 times the length of this article). Researchers and service providers need to ask themselves how many people really get to grips with these documents, and whether their agreement fulfils our idea of consent.

We may never be able to simulate every individual in a city, and we’ll probably never want to. But we are getting closer to being able to simulate the richness of the fabric that weaves together to shape our cities. If we can do this, then we will be able to provide useful input on how best to shape cities in the future – perhaps even down to the last street light, bus and block of flats.

Authors: Alison Heppenstal, Associate Professor in Geocomputation, University of Leeds; Nick Malleso, Lecturer in Geographical Information Systems, University of Leeds.