In stage two all players join the war with a vengeance, which rapidly turns into a zero sum game that lowers the profitability of the entire industry.
Clearing banks have usually been extremely careful to avoid being tempted into the stage two phase. When Save & Prosper and others tried to start a credit card price war, the dominant players hardly changed their hands.
So what can we make of the latest battle among building societies for current account holders? Abbey National - now a bank lest you forget - has already joined in. Yesterday Nationwide Building Society entered the fray.
The big clearing banks publicly laugh it off as a sideshow. After all, most societies offer slow and cumbersome current account services, so price-cutting is the only way they can grab market share. Sophisticated customers will stay away.
Privately, however, bankers have every reason to bite their nails. Everyone else is having a price war, why not banks too?
The clearers have huge money transmission overheads, costs which they use to justify the high fees and interest rate margins on their current accounts. If they begin to lose significant market share they will have to respond, and that will hit profits hard. Midland's promise to pay pounds 10 for every mistake shows which way the wind is blowing.Reuse content