Select Committee on Treasury Minutes of Evidence

Memorandum by the National Consumer Council



  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 together—strategy 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 2003.


  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 cross-subsidy.

  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 be credit scored;

    —  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.

January 2001

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