Sorting out sorting
Another waste of money is around the corner for the UK banking sector.
“Almost 1 million UK bank customers will be forced to have to use new six-digit sort codes… The change has been caused by the Vickers rules, which force banks to ringfence their high street operations from other banking activities.”
It’s time to put a stop to this yonks old nonsense about sort codes and account numbers and I think I know just the woman to do it: Andrea Leadsom, now Leader of the House of Commons, but formerly City Minister. In her evidence to Parliament in 2012, she said that:
“Full bank account portability would be good for the consumer and good for challenger banks. It would also be good for established banks—they should have nothing to fear from it being easier for customers to switch”
I have to admit to had a very soft spot for her when she was Minister. In a letter to The Daily Telegraph back in September 2013, she noted that — just as I had predicted — the Current Account Switching Service (CASS) which launched that month was (I paraphrase) a bit of a waste of time and money. In fact earlier this year, BACS promised to “remedy the system” because so few people have used it. The then Minister went on to say that customers should have account number portability and be able to switch banks as easily as they can switch mobile phone operators.
This was not new thinking. Six years ago the Independent Commission on Banking published an interim report on their Consultation on Reform Options. This report raised the subject of bank account number portability. Section 5.17, to be specific, says that:
Beyond improvements to the existing system, full account number portability would enable customers to change banking service providers without changing their bank account number. This would remove the need to transfer direct debits and standing orders, which remains the main area where problems may arise. In the past, portability has been rejected as overly costly, but if no other solutions appear effective and practicable, it should be reconsidered to see if this remains the case given improvements in IT and the payments system infrastructure.
It seemed reasonable for the Commission to wonder why customers cannot port their account number from one bank to another the way that they can port their mobile phone number from one network to another. That seemed a plausible request back in 2011, but the truth is that phone numbers and account numbers aren’t quite the same thing. A phone number is an indirect reference to your phone (well, your SIM card actually) whereas the account number is the “target”. Thus, we shouldn’t really compare the account number to the phone number, but think of it more as the SIM.
Hence a diversion into how mobile phones work. Each SIM card has a unique identifier, just as each bank account has an international bank account number (IBAN). When you turn on your phone, essentially, your SIM tells your mobile operator which phone it is in and then “registers” with a network. I am writing this in Copenhagen, where I just turned on my iPhone, so now my O2 SIM card is registered with a Danish operator. When you call my number, O2 will route the call to the Danish operator, who will then route it to my phone. But how does the call get to O2 in the first place?
In most developed nations there is what is called an “All Call Query” or ACQ system: there is a big database of mobile phone numbers that tells the operators which mobile network each number is routed by. In order to make call connections as fast as possible, each operator has their own copy of this database that is regularly updated. Note that for reasons that are too complicated (and boring) to go into there, in the UK there is a different scheme, known as indirect routing, whereby when you dial my phone number 07973 XXXXXX it is routed to Orange (because that’s where all 07973 numbers originated from) and then Orange looks XXXXXX number up in its own database to see where to route the call to (in this case to O2). This is why calls to ported numbers in the UK take longer to connect than they do in other countries.
So, back to the point. I am not against the principle that the Minister espoused. On the contrary, I am very much in favour of making it easier for customers to move accounts. It’s the implementation that is the problem. She formulated the problem as:
Ever since I was first elected I have been campaigning to ensure customers can change their bank accounts as easily as a customer can change their mobile phone provider.
If we treat the bank account number as the SIM number then we need to find something else to be the equivalent of the mobile phone number. It’s entirely possible to envisage a similar system working for banks, whereby we separate the equivalent of the mobile phone number — let’s call it the International Current Account Number (iCAN) — from the underlying bank account and have an industy database that maps iCANs to IBANs. This database would be the equivalent of the ACQ database. So the bank sends your salary via FPS to the iCan, and the database tells FPS which actual IBAN to route it to. No matter which bank accounts you use or change to throughout your employment, the employer always sends the salary to the iCan and thus reduce their own costs and your own hassle.
But what, in the UK, would be the actual iCAN? A good option is to have virtual account numbers. I’ve previously put forward the “7-0” solution around this.
The 70 code is unused, so we can issue people with [numbers] of the form 70-XX-XX 99999999. These would be compatible with all existing systems and with the IBAN scheme.
The idea here is that the customer gives billers, employers, counterparties the “70” account number that never changes but then chooses which bank account to map it to. They can change this at any time, there’s no need to go back to the billers, employers, counterparties and get them to change anything. This is a simple and inexpensive solution: allow anyone with a bank account to apply online for an iCAN and then let them change the account it maps to whenever they want to in the future. Bank customers could use the iCan immediately. And because of this strange quirk of British sort code allocation, it would mean that just as all mobile phone numbers begin 07, so all mobile account numbers would begin 70 and form the “unique identifier – in essence, a portable account number that would be retained by an individual/business on an ongoing basis” that the Minister referred to in her evidence.
The other way to approach the problem, and the better way in the long run, is to stop messing about with 1960s sort codes and account numbers and just use names instead. I used to have a CompuServe number (100017,3342 if memory serves) but now I have a Facebook id, a Twitter id and a LinkedIn id. Why can’t I have an Money id? As I said at the Payment Innovation conference a couple of years ago…
This all links to the discussions about the idea of a financial service passport (or a “payname”) at techUK last year. I really think that the idea of pseudonymous, strongly-authenticated CDD-inside identities is an idea whose time has come.
In this concept, we just want a simple, portable, pointer to a person that can be used to index into their KYC (“know your customer”) persona. The easiest way to do this would be to assign a unique financial services identifier to a person or other legal entity the first time that they go through a KYC process. This would be a money identifier (£ID) that could be a target for payments.
I might have the identifier “citizendave!barclays.co.uk”, for example. One someone has one of these IDs, then there would be no need to drag them through KYC again. This would greatly reduce industry costs and make the process of obtaining a new financial service — a new bank account, a new credit card, a new insurance policy, a new accountant — much simpler. Imagine the simplicity of applying for in-store credit for that new sofa by just giving them your ID and watching the application form magically populate by itself on screen.
Now, each of these £IDs would be associated with a payment account (a bank account, a prepaid account, an electronic money account or whatever else) that is “reachable” in EU banking parlance. That is, a Payment Initiation Service Provider (PISP) can from the £ID work out which account it is linked to it and make a credit transfer to that account. Then someone could send you money by giving your £ID: no need to type in names, sort codes, account numbers. Anyone could pay anyone by entering the ID into the ATM, or their internet banking screen, or (most likely) their mobile app.
Even better, of course, would be to make the £ID point to an iCAN rather than a bank account number. That way, we obtain the benefits of both approaches. It doesn’t matter if a person has many of these £IDs, because each £ID will have been obtained as the result of a KYC process. If the Directory ends up with two “Dave Birch” entries, so what? It’s not an ID card scheme, it’s a “save money for the financial services sector and make life easier for consumers” scheme. And it wouldn’t matter either if both of my £IDs point to different bank accounts: I might, for example, have a personal persona and a small business persona—lets say citizendave!barclays.co.uk and citizendave!rbs.co.uk and that point to my personal and my small business accounts—and I want to use them for different purposes. No problem.
Picture this new world of fintech and regtech in harmony. You are fed up with the appalling service you get from your bank, so you walk into a branch of New Bank. You ask to open an account, and are directed to the ATM in the lobby and asked to request a balance from your existing current account. You put in the card and enter the PIN. While the ATM is carrying out the balance enquiry, the £ID (obtained from your bank) is sent to the Directory and within a couple of seconds both your account balance (from your bank) and your picture (from the Directory) are on the screen. The New Bank agent presses a button and a pre-filled application form is presented for you to sign and, once you have, you are given the option of pointing your iCAN associated with the ID to the new account. No fuss, no effort, done. And if your employer sends you salary to your ID one second later, it will correctly route into the new account.
Thus, I can make Andrea’s dream come true and in a cost effective manner. Stage 1: create the “70” virtual account number directory and make sure that credit transfers to iCANs work properly. Stage 2: mandate that all banks give account holders the means to obtain an iCAN for each of their accounts. Stage 3: introduce financial services identifiers and allow holders of identifiers to map a default iCAN to that identifier.
Together with my colleagues at Consult Hyperion, I stand ready to answer the nation’s call. If they really want portable account numbers, we know what to do.