The Economics of Retail Banking - an Empirical Analysis of the UK Market for Personal Current Accounts

Abstract

Understanding the economics of retail banking is important for the Bank of England in carrying out both its monetary stability and its financial stability function. In this article, we study the dynamics of the UK market for personal current accounts between 1996 and 2001. Analysing the evolution of banks' market shares and their pricing strategies, two questions are addressed: (i) Do bank market shares respond to price differentials? (ii) If not, why not? Our results point to customer switching costs as a key determinant of the nature of competition in the market for personal current accounts during the 1996-2001 period. They are thus broadly supportive of a number of initiatives that have since been undertaken to reduce such costs.