Banking Duopoly is a Poor Deal For Ireland

Lack of competition, unregulated ATMs, IT failures, apps offering crypto trading, it all points to the need for a vision for the banking sector. Neasa recently outlined her thoughts on Ireland's banking duopoly in the below op-ed.

This op-ed originally appeared in the Sunday Independent on 20th August 2023 and can also be found here.

Notwithstanding last week’s dramatic run on the banks in the form of errors which allowed people to withdraw more funds than they had in their accounts there is a more serious and systemic crisis in the Irish banking sector.

Ireland now finds itself with only two large pillar banks (three if you include the smaller Permanent TSB). The banks are enjoying soaring profits while deposit rates remain low. Ireland has allowed a duopoly to form, with little competitive pressures to balance the market, and this is happening in a sector that should effectively be seen as a utility.

The Department of Finance seems to be out of ideas as how to address this failure, either unwilling or unable to properly regulate the banks, attract new entrants to the market, instigate windfall profit taxation, or invest in a system of public banking to protect citizens' interests.

At the beginning of the summer the Government allowed its stake in AIB to fall below the 50pc threshold that had been in place since the 2008 crash and banking crisis. This stake was the Government’s best and most effective tool for intervention in a market with no state-led underpinning.

It is not hard to imagine there was much rejoicing in AIB at this development. Pillar banks, as Ireland has learned in the most painful way, prefer to operate as fully private and competition-based entities. The contraction of personal banking services is the canary in the coal mine here.

Though Ireland has yet to experience the access-to-cash difficulties of other European countries, the fact that Irish banks sold off almost their entire book of ATMs to unregulated private companies since 2020 indicates clearly where priorities lie. (Following pressure, the minister has signalled that these companies will be regulated by the Central Bank and that he will be bringing legislation forward this year.) There is one thing we can be fairly certain of: with the Government’s withdrawal as majority stakeholder in AIB we have entered a new era for banking in Ireland. It will include hikes in executive pay and bonuses, linked to profits based on their loan books.

It was ever thus. The market will follow the money and personal banking and financial inclusion will remain an afterthought.

Asked about where the future of Irish banking lies, Finance Minister Michael McGrath and his predecessor Paschal Donohoe have cited the changing nature of banking in an era of online transactions and increasing activity in EU-based approaches to a banking union and approaches to shocks in the market.

This is not an entirely wrong assessment. Banking has changed and mobile phone apps certainly provide a new element in a sector that has not seen much innovation.

However, for most EU citizens, online banking is a convenient additional service in a national sector where stable, state-led public banking is available. Something Irish people do not have access to.

This reaches to the very heart of financial inclusion in our country.

One has to wonder if the minister uses any of the banking apps he places such faith in. Does he regularly receive phone notifications from apps such as Revolut, encouraging customers to speculatively trade cryptocurrencies? Apps such as these are new products and are already moving beyond simple cash transfer services to a whole host of other services. Many of these services might be considered as being in conflict with the provision of reliable and safe banking.

The continued lack of engagement from the Department of Finance on the proposal for regional public banks is a significant error.

A 2019 government-commissioned report from Indecon found that a public bank or a system of regional banks (such as is the standard in Germany for example), while having merit, was not necessary due to adequate competition in the sector. At the time of the report there were six banks in the market, as well as credit unions and post offices. Now we have an effective duopoly just two big banks to choose from.

We have made some good progress in supporting credit unions to develop and broaden their offering to consumers, though much more should be done here. It is time to take everyday personal banking just as seriously.

This year, as a result of bumper corporation tax receipts, the State has enough funds to capitalise at least one regional bank. The midlands at the centre of the debate around a just transition from carbon-heavy industry to carbon-efficient jobs would be an ideal place to begin. A regional bank would support access to credit and financial inclusion in away that would benefit communities for many decades into the future.

In banking, competition is widely perceived as a source of efficiency and often soft regulation. Certainly that seems to have been a guiding principle of banking policy by Fine Gael for over a decade.

But in this important sector, a trade-off between competition and stability may appear and, at the moment, Ireland is offering neither to its citizens.

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