BUSINESS OPINION: It says something about the lack of competition in the Irish banking industry that the launch of one mildly innovative product can garner so much publicity, writes John McManus.
Several forests in Finland have probably been consumed at this stage to provide newsprint for the coverage of Permanent tsb's latest marketing wheeze. It is hard to imagine any other country in Western Europe where there would be so much fuss over a bank deciding to link an equity release product to a cheque book
Can you imagine what would happen if a bank was to do something as radical as offer retail customers interest of 3 per cent on their current account balance and no charges. If last week was anything to go by, newspapers would bring out special supplement's and RTÉ would devote an entire Primetime programme to it.
Indeed, what would we make of a bank that offered an overdraft rate that was 5 per cent below that charged by its bigger rivals? Or what about a bank that, in return for charging you around €10 a month for your current account, gave you card holder protection and extended warranties on your credit cards, not to mention a free 24 hour legal helpline and special rate on childrens healthcare?
A national holiday would probably be in order if one of the banks offered a current account mortgage whereby salary, credit card, car loan and home loan are all in one package. This revolutionary product would allow you pay off your mortgage earlier and cheaper because your salary cheque would help offset the loan each month, at least until you spent it.
But such conjecture looks set to remain idle for the foreseeable future, although these mind blowing products are freely available in Britain, which to the best of my knowledge has a broadly similar financial services industry.
The difference, of course, is competition. In Britain there are roughly 120 mortgage lenders offering some 4,500 different products, In Ireland we have 12 players with around 70 products. Put another way this means that the average British mortgage lender has some 37 different products on offer, while their Irish counterpart has six.
It is pretty obvious that that the dominance by Bank of Ireland and AIB of the Irish market for financial services is killing competition and, in the process, forcing the public to overpay for loans and other services. Permanent tsb's OnePlan product highlights this unhappy state of affairs in two ways.
The first, as already mentioned, is in the way it has uncovered the massive appetite among consumers for innovative and competitive financial products. You can take it as read that the coverage earned by the product's launch reflected something more than the usual journalistic obsession with mortgages and gratuitous pictures of scantily glad models that are used to enliven such events.
The other way in which the quasi-cartel that passes for a competitive financial services industry was shown up last week is less obvious. In a truly competitive market, it would be reasonable to expect the market leaders with their superior resources to be the font of innovation. The reality is that, left to their own devices, AIB and Bank of Ireland would not have come up with a product similar to Permanent tsb's in a million years.
THE product - which essentially offers short-term personal loans at long-term mortgage interest rates - competes directly with their lucrative personal loan business. Frankly, both AIB and Bank of Ireland would be mad to introduce such a product, unless of course the other did so unilaterally and in the cosy world of Irish banking that sort of thing does not seem to happen. It is no accident that any real innovation or competition we have seen in the Irish market in recent years has been provided by the foreign banks. It took the entry of Northern Rock to shake up the deposit market and the arrival of Bank of Scotland to drive Irish mortgage rates down towards European levels.
The fact that the latest move comes from an Irish-owned institution is surely good news. Permanent tsb has presumably done its sums and calculated that the gains from introducing this product will compensate the cannibalisation of its own personal loan book. It will be interesting to see how the two big banks now respond. I would not hold your breath if you are waiting for them to offer you a similar product.
Against this background it would be an act of lunacy for the Government to allow the merger of the two big banks as proposed by Michael Soden, the chief executive of Bank of Ireland. Equally the call by the Irish Bankers Federation last week to allow the industry set its own charges seems like a bad joke.
The president of the federation, Mr Donal Forde - a.k.a. the head of AIB's retail banking operations in the Republic - said that the Director of Consumer Affairs was distorting competition through the regulation of bank charges.
His thesis was that if the banks were allowed charge whatever they like, competitive pressures would drive down fees and charges. In a genuinely competitive market this would be the case, but in the Irish context you would have good grounds to expect that the two big banks would screw customers in the retail market - where they face little competition - in order to subsidise operations in the few sectors where they do face competition.
It would be grossly irresponsible of the Government to let the "market" set things like bank charges until a real market has developed. The positive news from last week is that, courtesy of Permanent tsb, another small step has been taken in that direction.
