Bank charges: we need more competition

So the Office of Fair Trading is withdrawing its attempt to force the banks to reduce their charges for going overdrawn to reasonable levels. This is a pity: we all have stories about the way banks behave to their customers. For a week or so, I was charged every time my account fluctuated above the critical level. If I hadn’t bothered to put money in, I would only have been charged once.

But regulating the banks into reasonable charges was always going to be a difficult call when the underlying economics of the situation allows them to charge pretty much what they like. The real issue here is not about regulation, it is about competition. We have too few banks – far too few compared to our competitors. That is why Britain is taking so long too claw its way out of recession.

There are only 170 branches per million people in the UK, compared to 520 in Germany and 960 in France. No wonder small businesses, and individual retail customers, get such a raw deal. We will carry on getting a raw deal until the government breaks up the oligopoly they have allowed to build up, which can charge what they like – and pay themselves what they like – because there is barely any competition.

What is fascinating about this approach is how shy the Conservatives are about it, and here is the dilemma for the Cameron government. Do they allow the semi-monopoly to continue, in the name of some perverse version of the free market, and pander to the financial lobbyists (as seems likely) or do they step in and create a proper free market in banking.

The first is unthinkable – for anyone who wants to make the UK economy thrive – but the second is so terrifying that they seem unlikely to do it. We look set to have another government which espouses open markets in theory but daren’t put them into effect in practice.

It is, in short, precisely the issue that the Liberal government of 1906 was swept to power on.

Boyle's Law for public services

The writing is now on the wall for the combination of centralisation, process bureaucracy and inappropriate IT systems which have been such a disempowering feature of our public services for the past decade. Research published in the American Journal of Medicine shows that IT investment in health services doesn’t cut costs:
http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6TDC-4XSCVHB-1&_user=8725334&_rdoc=1&_fmt=&_orig=search&_sort=d&_docanchor=&view=c&_acct=C000050221&_version=1&_urlVersion=0&_userid=8725334&md5=df823db1f8d6ba9cfbcf2eb0dce474f0

In fact, the hospitals which had invested most quickly in IT solutions had found that their administration costs had risen the most. Those on the ‘Most Wired’ list had not managed to cut their costs at all.

This is important stuff because it confirms that one of the most disastrous aspects of New Labour centralisation has been the massive IT projects in public services. They didn’t just cost a huge amount. They also set processes in concrete, so that they became inflexible.

That is the real disaster about the government’s misuse of IT: it has taken the exhausting bureaucracy and it has made it even more inflexible than before. It can’t now be reformed without dumping entire IT systems.

Go along to A&E at King’s College Hospital and you will find that nobody can help you until they have gone through more than 20 pages of questions on their IT system. This kind of inflexibility – more about satisfying the craving of the centre for data than it is about helping patients – is repeated throughout our public services, and goes some way to explain why they are as expensive as they are.

But there is an even more important aspect than this. The way IT has been use in public services has overwhelmingly been to remove the human element in healthcare, to make one doctor interchangeable with any other, just as they have tried to remove variable human beings from a range of other public service systems.

This is part of the agenda of the American healthcare industry, a slow shift to the position where real treatment decisions are based on a quick conversation about symptoms between the doctor and the insurance company, in order to slot patients into their huge database of NICE-style cost-effective practice. It is an agenda which has been driven, not by doctors but by health consultants, and it is parallel to the same kind of agenda that is creeping into education.

None of this is to suggest that IT is useless. Quite the reverse. It has obviously changed the way we all work and can vastly increase the efficiency of what we do, but not if we try and take people out of crucial relationships with professionals. Nor if we believe somehow that critical human relationships can be reduced to data.

The problem is that these systems are far more ambitious than simply easing people’s work with IT. They are moving into areas where they frustrate the process whereby change happens most effectively, which is in face to face relationships. In those circumstances, IT investment undermines people’s ability to use their intuition, trust and creativity. Huge IT investment is bound, therefore, to lead to less successful organisations, more mistakes, less imagination and more crass simplification. Hence the latest findings.

This is, in fact, my own version of Boyle’s Law: The more money that is spent on IT, the more it costs everybody else.

There are obviously exceptions to this law. I am not being a Luddite here, or not seriously. Where IT gets to be a problem is where technological solutions are used to suppress the brilliant possibilities of human beings. Then the shrinking ability of the organisation to learn, to achieve its objectives effectively and imaginatively, means that we all have to pay more – whether it is in buying the products or in our taxes because the health systems heal less effectively, or our schools educate less effectively. If people get ignored, it costs us.

That is the disastrous hidden narrative of Gordon Brown’s public service reform, but it needs a political party to articulate it clearly.

Reference: David Himmelstein, Adam Wright and Steffie Woolhandler (2009), ‘Hospital Computing and the Costs and Quality of Care: A National Study’, American Journal of Medicine, 24 Nov.

The disaster of Gershon

The news that Sir Peter Gershon has been swallowed by the Conservative Party is bad news for public services. It implies that Cameron will follow the Gershon prescription for efficiency – and that means more of the same.

In fact, the 2004 Gershon Review – which included coachloads of representatives from the IT consultants PA Consulting – has been disastrous for public services. It decided (surprise, surprise!) that huge investment in IT was required.

The result has been huge factory back office processing systems, vast waste, less human contact with the general public – who have to interact via call centres which may or may not have the particular issue they are calling about on their software.

It has meant a de-humanising sclerosis for public service systems, and it has locked inefficiencies into concrete processes. The systems thinker John Seddon reckons that public sector call centres are wasting between 40 and 80 per cent of their efforts as a result. See for example some of the discussion on this on www.systemsthinking.co.uk

But it does provide an opportunity for the Lib Dems for a coherent critique of public sector efficiency, if they have the nerve. But Gershon is not anything that should be emulated.

How to save RBS from its directors

Vince Cable was quite right on the Today programme this morning. The response to the RBS director’s threat to resign if they are not allowed to pay the bonuses they want to their failed, cash-strapped, state-owned bank should be to say: go ahead.

But we need to look a little more closely at the business of banking bonuses. They are paid out of a percentage of the profits of the investment divisions, sometimes up to fifty per cent. The money would otherwise go to the shareholders – the same ones who failed to exercise proper control over the bank they owned.

There are some, and Fortune magazine is among them, who say that they are better shared with the staff than shovelled at the owners – and that’s right as far as it goes.

But the real question is not why the bonuses are so high. It is why the profits are so high. They come, after all, out of all of our pension investments, or the debt that goes to build productive business, or capital investments in public infrastructure. The real scandal is that these bonuses are paid out of fees which ought rightly to stay with the small investors who are watching the value of their pensions falling.

The fact that the banks are able to award themselves such hefty fees is purely because we have allowed a semi-monopoly to build up in banking, both domestic and investment banking. So here is the real solution: slash the bonuses, accept the resignation of the directors, put in their place bankers who are prepared to do what is necessary to break up RBS into its constituent businesses and regions.

In the process, they can rebuild the competitiveness of RBS and their investment arm by massively slashing the fees they charge borrowers, individual pensioners and savers. That is a business model that might work: genuine competition.