From a customer’s perspective, there are numerous benefits of inter-bank account number portability, but the implementation depends on two key enablers in the Indian context — Aadhaar as the unique identification for customers and National Payments Corporation of India as a central payment mechanism.
Competition in retail banking could be set for a quantum leap, with the banking regulator sounding out stakeholders on a possible plan to allow customers to retain their bank account number even if they switch banks, like they would with a mobile phone number. The plan entails enabling a dissatisfied customer to simply shift his banking relationship, lock, stock and barrel, to another bank. The two key enablers for this in the Indian context are Aadhaar as the unique identification for customers and National Payments Corporation of India (NPCI) as a central payment mechanism.
Both are key to a move in the direction of bank account number portability, which would need the fulfillment of three essential pre-requisites — a shared payment system, a unique identity and a central clearance system. The shared payment system, regulated independently, would be needed where all account number and payment instructions are warehoused (such as standing instructions or direct debit), while operationalising of the central payment system would require credits and debits to be linked to the unique identification.
While RBI Deputy Governor S S Mundra has indicated that “some international banks are already supporting the idea”, the possibility of rolling out banking number portability has been flagged as an idea in some developed markets as well. In March 2015, the UK’s Financial Conduct Authority released a report highlighting the benefits of bank account number portability in encouraging consumers to switch banks. In Australia, the Centre for International Finance and Regulation (CIFR) — an organisation that provides a strategic link between academia, policy-makers, regulators and other industry participants, and is funded by the Commonwealth and New South Wales governments, universities and industry partners — had, in a report last year, asserted that competition in retail banking could be enhanced by allowing customers to retain their bank account number if they switch banks. But the recommendation was dismissed swiftly by the banks as being “impractical” and “too costly”. In India too, the idea runs the risk of facing some degree of resistance from banks.
The RBI had set the ball rolling on the concept of account number portability nearly four years back, albeit in a limited manner. In April 2012, the regulator asked banks to allow intra-bank account portability in cases where full KYC (know your customer) details of the concerned account had been ascertained. The facility was aimed at enabling the customers to shift their account to any of the desired branch any number of times, without any change in the account number. In a notification issued then, the RBI had said that “banks are advised that KYC once done by one branch of the bank should be valid for transfer of the account within the bank as long as full KYC has been done for the concerned account.”
Inter-bank account portability, though, is a different ballgame altogether. The RBI Deputy Governor, while proposing the need to move on newer concepts such as inter-bank account number portability, called on banks to consider the disruption possible through blockchain technology — essentially a distributed database used for ensuring secure transactions that is currently being used by cryptocurrencies such as Bitcoin. A number of global banks have been working with blockchain technology to find uses for it in traditional banking businesses. Last month, the Financial Times reported that JPMorgan Chase & Co has begun a trial project using blockchain technology to cut the cost of trading.
From a customer perspective, there are numerous benefits of inter-bank account number portability. The UK Financial Conduct Authority’s March 2015 report highlighted the benefits of bank account number portability in encouraging consumers to switch banks and the resultant increase in competition in the financial system. The FCA report revealed that 35 per cent of consumers and 40 per cent of businesses “would be much more likely or more likely to switch if they had portable account details”. The research signaled that customers view account number portability as reducing the risk of changing banks as it makes the process quicker and smoother.
Clearly, for bank account number portability to be effective, the customer’s details and payments needed to be accessible by both the old and new bank. The FCA report proposed one option as that of having a “central utility model”. This model could include features such as a “know your customer” database to store customer details for identification and a “payment mandates database”. The idea is for providers to continue offering competing products and services to customers, whilst using a “shared banking platform”. While the FCA did not provide specifics of how bank account number portability would be implemented, it did provide a framework to be further examined — involving a local database for each institution to initiate switching requests working alongside a central database, accessible by all banks, with all customer account numbers.
This approach is similar to that used for mobile number portability in Australia since September 2001. While a centralised database system is generally regarded as a high cost intervention, the focus under the Australian model has been towards establishing a process where one of the four big banks will manage the database, which is then checked by the remaining big banking institutions. In the telecommunications sector, Australian telecom major Telstra runs the equivalent data repository known as the Integrated Public Number Database.
For inter-bank number portability, the CIFR report specifically pointed to mobile phone number portability that was introduced by regulation in Australia in 2001 and allowed mobile users to move between carriers with the same phone number in a matter of hours, creating more vigorous competition among telcos. “Introducing bank account number portability is an important step towards implementing a measure that would make switching quicker, easier and less risky, and which would, in turn, increase customer confidence and willingness to switch — a necessary component for vibrant competition,” the report noted.
CIFR’s recommendation was, however, dismissed by the Australian Bankers’ Association, which said bank account portability had been studied by former Reserve Bank of Australia Governor Bernie Fraser in a report for the government in 2011 and rejected on the grounds of “excessive cost”. In India too, preparing the grounds for ushering in inter-bank account number portability could be key to its success