Kroes attacks banks for stifling competition behind national barriers

Kroes attacks banks for stifling competition behind national barriers

Neelie Kroes, the EU competition commissioner, has accused Europe's retail banks of failing to make it easy for customers to switch accounts and of sheltering behind expanding profits on their home turf.

Ms Kroes also issued a fresh warning to credit and debit card companies that they faced legal action and fines unless they cut charges and opened up networks to non-bank competitors.

The companies, led by Visa and MasterCard, accused the commission of using inaccurate and outdated analysis and said the commission risked raising the charges consumers paid on card transactions.

The exchanges came at a public hearing on an EU inquiry into retail banking. The inquiry highlighted obstacles to creating a genuine European market in card payments and bank accounts and loans. The commission found that retail banking markets remained fragmented along national lines, with significant entry barriers, and that customers rarely switched.

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Ms Kroes accused the industry of failing to respond to her open invitation to help break down national barriers.

"Market players place more emphasis on defending and protecting their market position than they do on seeking to expand and create new opportunities throughout Europe." Only 8% of European customers switched bank in 2005 and customers were not putting pressure on banks to provide better services and value.

The commission found that Austrian and German banks made pre-tax profit margins of 11% and 17% respectively, but in Ireland, Spain and Finland gross margins were over 40%. In Britain they were just under 40%. Overall earnings were higher in countries with the least switching. BEUC, the EU consumer body based in Brussels, said on average it cost €335 (£230) to switch banks in France and in Britain only one in 20 consumers had switched in the past two years.

Ms Kroes also demanded more competition among banks providing card acceptance services to merchants and entry for other providers. She repeated her accusation that the sector was making "abnormally high" profits.

Javier Pérez, president of MasterCard Europe, accused Ms Kroes of relying on "incomplete, inaccurate and inconsistent evidence". Last month Ms Kroes formally charged MasterCard with restricting competition among banks using its credit and Maestro debit card services through fixed fees, but Mr Perez said abolishing the fees would force banks to surcharge customers.

Explainer: Regulators stymied

Bank profits have proved an elusive target for regulators. Britain's five main banks made more than £30bn last year yet efforts to pursue profiteering claims have largely come to nothing.

Yesterday's announcement by EU competition commissioner Neelie Kroes, left, opens another front against the banks, though it is a repeat of the accusations made by the British government that prompted the Cruickshank report in 2000. The former stock exchange chairman said overcharging was costing customers £3bn to £5bn a year. He set out 53 recommendations predominantly aimed at breaking the stranglehold the big banks had on current accounts, services to small business and the way money was transmitted around the system.

The Treasury brought in rules to simplify the switching process, but to little effect. Other recommendations were dropped after the banks said Mr Cruickshank got his sums wrong on current accounts, arguing that, like non-charging cash machines, they were subsidised by more profitable business.

This time the attack is more targeted with inquiries into "excessive" charges and "profiteering" on insurance sold with loans and credit cards. Again the banks argue curbs would hasten the demise of cross-subsidies and hence of free banking.

Phillip Inman

Guardian Unlimited © Guardian Newspapers Limited 2006