Competition in Nordic Retail Banking.

Abstract

Nordic retail banking markets are still dominated by large domestic banks with ratherloyal domestic clients. During recent years, however, some of these banks have expanded in neighbouring countries. For example, banking is a major export product forIceland, including the expansive Kaupthing and Glitnir banks. Nordea is, after a series of mergers, among the three largest banks in Finland, Sweden, Norway and Denmark. Danske Bank, accounting forroughly half the market in Denmark, has recently become the fifth largest bank in Sweden. Swedish SEB and Föreningssparbanken account for a very large part of the market in the Baltic States. The major Finnish and Norwegian players are also looking at nearby markets. This integration process is likely to continue.

Parallel to this process, a number of new actors and fringe players appear to be growing in most markets. These banks may aim forthe entire portfolio ofretail bank customers, orfor some product segment, such as mutualfund management. Nevertheless, although competition in some countries may have increased, the impact on the industry is yet to be seen, since concentration remains stable at quite high levels.

The sum of the fourlargest banks’ market shares (measured in total assets) amounts to 71-100 percent in the six examined Nordic markets. This is a relatively high figure compared to other European countries, and the development suggests that any significant decrease is highly unlikely. Profitability measures, profit statements by banks and Central Bank judgements indicate that Nordic banks are profitable. From a stability perspective, this situation is satisfactory - the risk of default of the system is marginal. The market is dominated by banks that are financially sound. From a competition perspective, however, the margins in the industry suggest that banks can give consumers substantially better offers and still be profitable. In other words, more competition between banks can benefit consumers in terms of better products at lower costs.

In all Nordic countries, the number of branches is falling. Tele-banking, and in particularInternet banking, are associated with this development. Some niche operators have taken advantage of the new marketing channel and concentrated theirinteraction with their customers to the Internet, thereby eliminating the need for a physical branch network. Although this may increase the likelihood of new entry to the Nordic banking market, other factors may restrain it. Forinstance,retail banking belongs to a family of services that for households represent a substantial element of trust. Thus, consumers may wish to remain with the well-known providers ofretail banking services despite better(but perhaps perceived as uncertain) deals being available. Such consumerimmobility may constitute a restraint to competition.In addition, banks often offer consumers various forms of discount packages, frequently bundling different products together at favourable prices, thus providing strong incentives forloyalty to a single bank.

A low frequency among consumers to switch banks can be harmful for competition. Potential entrants to the market would acknowledge that gaining large groups of customers rapidly, a prerequisite to achieve a viable scale of operations, is a challenging, time-consuming and highly risky affair. Hence, potential new players in the market may abstain from entering, easing the competitive pressure on the incumbent banks and resulting in higher-than-necessary costs for customers.

Sound competition therefore necessitates a certain degree of consumer mobility. Also warranted is more cross border activities. Although large Nordic banks are investing in the neighbouring markets, there exist several obstacles to better connect national markets together. Such obstacles may arise because ofregulatory differences between countries, such as the rules for VAT and deposit guarantee schemes. Other obstacles to integration include the very national structures of payment systems – partly a natural consequence of the use of different currencies in the Nordic countries. Efficient access to these payment infrastructures is a prerequisite to enable a bank to compete efficiently in the market.

In the nearfuture, the payment systems in the Nordic countries need to be betterintegrated to enable inexpensive and rapid cross-border money transfers. In the euro area, the creation of the Single Euro Payment Area, the SEPA, and the adoption of a New Legal Framework, the NLF, has the potential to push development in the euro area in this direction. The reforms will have consequences not only on the euro area but also on the Nordic market. It is desirable that the regulatory environments in the Nordic countries do not impose restrictions on the further development of efficient payment products between the non-euro Nordic countries and the euro area. The national competition authorities in the Nordic countries have an importantrole to play in participating in these processes, to ensure that the new structures are pro-competitive.

A policy for better competition in Nordic retail banking markets with the aim to build an integrated market for consumers, must consider all these areas carefully. In this report, payment systems and consumer mobility has been scrutinised.In the view of the Nordic Competition Authorities, these two areas merit high priority on the agenda of Nordic Governments in orderto facilitate a development towards more competition to the benefit of consumers.