Memorandum by the National Consumer Council
INQUIRY ON BANKING
The National Consumer Council welcomes the opportunity
to give evidence to the Treasury Select Committee's inquiry into
Banking. Given that we have a special remit for representing the
interests of disadvantaged consumers, we have particular interest
and concern about the access this group has to personal banking
services. We are looking at what are, or are becoming, essential
services in a range of sectors. Here, we intend to focus on our
comment on aspects of personal banking services and social exclusion.
The problem of access to financial services
has been highlighted in recent years as a part of the Government's
overall campaign against social exclusion and poverty. The report
of the Social Exclusion Unit (Bringing Britain togetherstrategy
for neighbourhood renewal, 1998) on deprived neighbourhoods in
early 1998 identified lack of social exclusion. Based on the recommendations
of this report, the Treasury appointed Policy Action Team 14 (PAT
14) in November 1998, tasked with investigating the scope of widening
access to financial services.
From a different perspective, the Chancellor
invited Don Cruickshank to investigate competition in banking.
His report Competition in UK banking: a report to the Chancellor
of the Exchequer was published in March 2000. Other initiatives
have come from the Office of Fair Trading in their report Vulnerable
Consumers and Financial Services (January 1999) and the Department
of Trade and Industry's promotion of universal banking services
based in the Post Office.
This has been a period of welcome active Government
involvement in attempting to ensure universal access to banking
services. This focus is long overdue, and augurs well for the
resolution of what has become an intractable problem of financial
exclusion. We welcome it.
In recent times there has been an increase in
access to banking services. In the 1970s, for example, less than
50 per cent of households had current accounts. The reform and
deregulation of the banking sector in the 1980s and technological
developments have assisted the trend towards increased access
to banking services.
The most recent figures show that 93 per cent
of households and 94 per cent of adults over 16 have a bank account
of some sort (Access to financial services, Pamela Meadows
for Britannia Building Society, December 2000). Seven per cent
of households, therefore, are excluded from the benefits of a
modern banking system. Often these people are from the most socially
excluded communities. Exclusion from banking reinforces their
social exclusion. They are broadly found to be in households characterised
by long term unemployment of the head of the household and living
mainly on benefits with an estimated weekly income of £50
to £150. They also comprise ethnic minorities, single parents
(mainly women) and pensioners.
Banking services are becoming increasingly essential
to everyday living. They provide a "gateway" for individuals
to participate in today's economy, as Cruickshank acknowledged.
They can also bring extra financial benefits such as discounts
in utility bills and access to cheaper goods by mail order or
through the Internet. Operating without a bank account can exacerbate
social exclusion. This problem will be even more urgent when benefit
payments will start to be paid directly into bank accounts from
The evidence is that only a small minority is
refused banking services, and another small minority does not
want to have anything to do with banks at all. The majority of
those without accounts, however, finds banks unhelpful and have
a perception that they will be refused an account on the basis
of their credit scores. In addition, some who have left regular
full-time employment think they do not need an account (Understanding
and Combating Financial Exclusion, Kempson and Whyley, 1999).
Further evidence (Access to Current Accounts,
Personal Finance Research Centre for the British Bankers Association,
August 1998) also shows that the design of bank accounts is unhelpful
because they do not suit the needs of consumers on low income
and pose risks and costs. These consumers realise that it is very
easy for them to incur charges by an accidental overdraft: "often
they had only overdrawn by small amounts (£10 or less) although
the charges accounted for a large proportion of weekly income
and severely disrupted their budget" (Kempson and Whyley).
Clearly the "ordinary" current accounts, with the inherent
delays in money transmission, do not help those operating tight
budgets who need to have close control of transactions.
Cruickshank proposed two options for providing
increased access to banking services. Firstly, given the particular
problem of the lack of information on basic banking services,
he recommended that the Government should give top priority to
developing a benchmark for basic banking services. Whilst we do
not want to limit innovation, we support the idea of such a benchmarking
scheme to ensure consumers know that a "basic bank account"
meets certain minimum criteria.
Secondly, Cruickshank suggested that the Government
could define a universal banking service and tender for the lowest
subsidy required. Cruickshank is therefore making a strong argument
for funding universal access through taxation rather than consumer
Whilst the proposal has much merit, cross-subsidies
are used to fund universal access in other areas for example the
utilities and postal services, where flat rates and geographical
averaging are used. The National Consumer Council has supported
this use which has benefited both rural and lower income consumers.
There are cases, however, where cross subsidies can lead to perverse
outcomes, where the better off consumers benefit at the expense
of the less well off.
There are clearly extensive cross-subsidies
in personal banking and Cruickshank highlights an aspect of this
with free banking. He says, as an example, there is a subsidy
to those with high numbers of transactions and low balances, from
those with a low number of transactions and high balances. Those
with low balances whatever the number of transactions, who find
it difficult to keep credit, may also subsidise those who are
never overdrawn (whatever their balances or transaction rates).
This is because there is a contribution to the bank's overall
revenues by the charges paid by those who go accidentally overdrawn.
Another example from research by Mintel shows that a third of
customers never or rarely use cash machines. With a free cash
machine system, those customers are subsidising those who use
cash machines more frequently.
It is unclear to us what the distributional
impact of these cross subsidies is and how it will be affected
by the greater provision of basic bank accounts.
However the basic banking service is provided,
we broadly agree with Cruickshank that for consumers to participate
fully in the economy there are minimum requirements for basic
banking services. In addition to receiving electronic credits,
making electronic payments, depositing cash or cheques, accessing
cash from ATMs or in retail outlets, they must also:
not allow accidental overdrafts;
offer free access to cash;
allow speedy cheque clearing and
money transmission; and also
provide standing orders, direct debits
and budget payment facilities.
Basic bank accounts
PAT 14 recommended that the most useful accounts
to low income consumers should offer core services including the
ability to receive income (including benefits) paid by automated
credit transfer (ACT); accept pay in for cheques and cash; allow
cashing of cheques and are able to access cash at cashpoints and
bill payment facilities such as direct debit. They recognised
the driving force for such accounts was the Government's decision
to end the paper based benefits payment system by 2005.
In response to this, the major banks and building
societies are now providing what are known as "basic accounts"
to help deal with some of the barriers: access to standing orders,
direct debits, debit cards, cash from ATMs and retail outlets.
The accounts are not credit scored, and there is no possibility
of going into overdraft.
Universal banking services form the Post Office
and the banks
We note that the Government, the Post Office
and the major banks reached an agreement in December on the provision
of universal banking services. The solution will be funded by
the Government, the banks and the Post Office, it will involve
a tiered portfolio of banking services ranging from a simple account
for the payments to the basic accounts being launched by the banks.
It will be offered both through Post Offices and the banks.
We welcome the universal banking services initiative
as a contribution to tackling social and financial exclusion,
particularly because an increase in the choice of products as
well as the delivery channels being both banks and Post Offices.
Nevertheless, given the absence of published information, we are
not able to conclude how cost effective the proposed universal
banking services is compared to other alternatives.
However, given that the perception of the majority
of those without bank accounts has been that banks and their products
are unhelpful to them, it is important that these initiatives
are actively promoted amongst the socially excluded communities.
We welcome the British Bankers Association's revised Banking Code,
which includes a commitment for banks to inform consumers of the
existence of any basic banking services. The Post Office, too,
will need to give priority to the promotion of their services.
We remain concerned about the problem of the
undue length of time it takes to clear cheques in the UK. Research
shows that it can take close to two weeks for consumers to get
access to their money paid by a cheque. This is unacceptable especially
for those low income consumers operating on tight budgets. Our
understanding that in other parts of the world this routine process
can take place within 24 hours, including the payment of interest.
We support intervention in this area since competition shows no
signs of delivering improvements.
Cruickshank deals with the imbalance in power
represented in the ownership of the money transmission networks.
He proposed the establishment of what he called "Paycom"
to regulate price transparency, good governance, non-discriminatory
access, efficient wholesale pricing and fair-trading. We strongly
support regulation in this area.