Examination of Witnesses (Questions 160
TUESDAY 14 MAY 2002
160. Mr Barrett, you just said you are in the
business of raiding each other's business and I think Mr Goodwin
said that tens of thousands of people change their accounts. How
many people stick with you? What proportion of your business is
(Mr Barrett) The propensity to switch in the business
is probably 15 to 20 per cent, but if you are giving very high
satisfaction levels, then people do not have a reason to switch.
Our satisfaction levels are in the 90 per cent in this particular
sector, so we have a pretty robust franchise of which we are quite
161. You are basing your business on a level
of satisfaction that you think is perceived. What about the rest?
(Mr Goodwin) As with all parts of our business, we
focus on what our customers want. If you look at the development
of this business, we focus very hard on what our customers want.
We would consider a large part of our customer base to be broadly
stable, because they are satisfied with our service. If at any
point you let them down on that, then we will lose those customers.
That is the premise on which all of our business is built, keeping
our customers satisfied and adding value for our customers.
162. Is there not a customer mind set of stability
in banks? Is it not the case that if you get a customer young
they will tend to stick with you.
(Mr Ellwood) Yes, they tend to, but one of the things
we do every month is speak to 20,000 personal customers and we
ask them how they rate our service. Ninety per cent say they rate
it satisfactory or very satisfactory. One of the reasons we have
a lot of "stickability" is that the vast majority of
these personal customers do not pay for their bank accounts. About
80 per cent of them, if they stay in credit, simply do not pay.
They are getting something which is free, there is no commitment,
there is no obligation on their part to buy any other product,
so a certain degree of stickability is perhaps not surprising.
(Mr Barrett) It is changing though. In the spirit
of candour I would say that the inertia of the customer was traditionally
quite pronounced in the UK versus my experience elsewhere. The
good news isbelieve it or not I believe it is good news
for us as wellthat complacency is out, the propensity to
switch is increasing, customer demands are increasing and we have
to up our act or we are going to lose the business either to the
fellows across the street or new entrants. Everybody wants to
eat our lunch. It is not the old days. Despite popular perception
the problem is one of definition. People say that banks dominate
banking. By definition they do. But there are many non-bank providers,
there are many product specialists, there are many mono-line players.
What you are finding is an increasingly demanding consumer, driven
by greater sophistication of the consumer, driven by an aroused
media, driven by the political climate of increasing consumerism.
I personally regard that as a positive development because it
will force us all to up our game. Is there room for us to up our
game? Yes. I would concede that historically the customer in general
in the UKif I may be so boldis long-suffering but
it is changing very fast.
163. Which part of the market would you see
you need to aim that at most? Switching accounts or new young
people, new into business, new out of school, new bank accounts.
(Mr Dalton) It is important to aim at both because
one of the jobs we have in terms of our businesses is to grow
our customer base. In our case, we aim at both: new customers,
young customers and switching customers from other banks. It has
to be remembered that there is no competitive advantage in inertia.
It is to our advantage to eliminate inertia and to encourage switching
because we all think that if we can do that the customers will
switch to us.
(Mr Ellwood) We are seeing a lot more switching in
things like credit cards now; maybe in excess of 200,000 card
customers move from one supplier to another. Certainly that is
our experience in the space of one year. It is a highly competitive
market and there are 65 suppliers of credit cards, 130 suppliers
of mortgages, over 30 suppliers of current accounts. It is beginning
to move. I agree that we are seeing a higher number of people
move from one supplier to another. We applaud that because the
people who offer the best service will win out on it.
164. Given the importance of the credit card
industry in switching accounts, how important is it that you aim
advertising of credit cards to young people, just-18s?
(Mr Ellwood) It does not make any sense for us to
advertise to any group of people if it is going to create a high
level of credit risk, where it is not good for them and it is
not good for us. We are very, very conscious of the responsibilities
we hold in areas like that but also we want to make sure we give
people the relevant products they need.
165. Do you all share that view?
(Mr Dalton) Yes. It is fair to say that most of us
would agree that if you have happy customers you will have a successful
business. We work hard every day to make sure that our customers
are happy and the research we dowe ask our customers and
that is a good thing to dotells us that they are. We understand
that happy customers mean good business.
166. Did Mr Barrett have a different view?
(Mr Barrett) Was your question on credit cards for
167. Yes; I am very concerned about that.
(Mr Barrett) Credit-worthiness is an issue. I am in
favour, under a controlled careful basis, of providing low limit
credit card capability. It is a safety issue. As a parent, this
is how I feel about it. You would not exclude anyone in terms
of their willingness and ability to repay. You have to be careful
in extending the keys to unlock credit. We are very interested
in tapping into the youth market. You are right, the net present
value of a baby in the cradle is quite attractive. If you can
recruit the whole family and the children and everything else,
it is very good business over a lifetime. I am interested in them
Chairman: Happy customers from Mr Dalton
and long-suffering customers from Mr Barrett.
168. For the last year the calculation has been
done that the Big Four retail banks made profits on personal banking
services equivalent to £539 for every one of the United Kingdom's
19 million households, which is equivalent to over £28 million
a day, over £1 million an hour, which equates to over £20,000
per sixty seconds. Could I just ask each one of you very quickly,
because we are short of time, what your answer to the following
question is? When a constituent of mine, average man or woman
in the street, says those are excessive profits, the retail banks
are making too much profit, is that man or woman talking complete
(Mr Dalton) I would not want to suggest that anyone
was talking complete nonsense.
169. So there might be something in what they
(Mr Dalton) I did not say that either.
170. Is it complete nonsense? Is there no shred
of credibility in that proposition?
(Mr Dalton) I am happy to answer the question. I would
not suggest that they were talking complete nonsense. What I would
suggest is that some of the facts are incorrect. The numbers you
have calculated are all very good and easy but you have missed
one and that is the capital which was required to earn those profits.
That capital is represented by the shareholders of the banks and
we figure that we have about 170,000 people who entrust their
money to us as shareholders and about 17 million who entrust their
money to us, their pensions to us as shareholders and hold shares
in the bank through various means. If you look at it from the
perspective of our £3 or £4 billion in the case of our
bank, or somebody else's bank £1 million, a day or a second,
fine, those are very interesting numbers and very dramatic numbers,
but you are missing one number which is the capital calculation.
We think that the return we earn on our capital for our shareholders
is demonstrated to be a reasonable return as compared with other
industries in the UK, as compared with other banking systems across
the world. That is my answer.
171. To sum up: you are saying there is no such
thing as an excessive profit and members of the public who say
there is are talking complete nonsense.
(Mr Dalton) I did not say that at all. I am not saying
there is no such thing as excess profit. I am saying the level
of bank profits as currently in the United Kingdom are not excessive.
172. I am grateful. I am just trying to expose
your thinking or flesh it out. There could be such a thing as
an excessive profit.
(Mr Dalton) Yes, there could be.
173. How might that arise? Has it ever happened
in relation to your bank?
(Mr Dalton) Not that I am aware of, no.
174. Do you think it has happened in the profits
any other banking institution has made recently?
(Mr Dalton) Not that I am aware of.
175. What might an excessive profit look like?
What might it be defined as?
(Mr Dalton) An excessive profit might be if you invest
one pound and earned £500 million on it. That might be excessive.
176. It is not something that banks in your
experience in relation to personal banking have ever done.
(Mr Dalton) That is correct.
(Mr Barrett) Clearly the stock market does not think
so or they would not have a PE ratio which is half the FTSE. If
banks were as profitable as everyone seems to think they are,
I am wondering why it is not reflected in the market value of
177. I am just trying to put to you what the
ordinary man or woman in the street might think. May I move on
quickly to this £500 million rip-off figure that Which
have produced today, which I am sure you are very familiar with?
May I just ask this? Their proposition, which is backed up by
all the evidence we have heard in this Committee before today,
is that on average the Big Four pay 0.1 per cent interest on standard
current accounts' credit balances; that is just an average figure.
That compares with an average with the new entrants of more than
three per cent. In relation to the best overdraft rates the best
ones you can get outside the Big Four are less than nine per cent.
The Big Four charge up to twice this on overdraft rates. In current
account credit balances and overdrafts you are way adrift, there
is a yawning gap with new entrants. What I should just like to
get a feel for is why there is that big yawning gap? Could you
explain that to us?
(Mr Goodwin) Yes, I can certainly attempt to. First
of all you are not comparing like with like in terms of products.
That is the most fundamental point. In return for the current
account offering which we provide free of charge to customers,
it is clear that some products get a rate of interest which is
less than some of the new entrants. Even when you start to look
amongst the new entrants and you ascertain that a number of the
more publicised ones have requirements for you to deposit a certain
amount each month, if you do not meet that, you revert to terms
very similar, funnily enough, to those of the people you are talking
to today. A number also make higher charges for borrowing and
require a regular fee. So the comparison is not as straightforward
as you make it. Keeping it at a high level, very few of the new
entrants offer branch networks, which we offer, the ability to
interact with the bank by telephone, the ability to use our ATM
network. We offer a service which is different from that offered
by new entrants. The ability particularly for small businesses
to come in and have cash handled in the branch or to come in and
meet their relationship manager is not offered by many of the
new entrants. It is also the case that we offer a suite of products
to our customers which includes savings accounts, deposit accounts.
I go back to a comment I made earlier. A money transmission account
is not the best place to keep your money if you want to earn interest
on it. We have available automatic sweeps which enable people
to have balances taken out of their current account and put automatically
into a savings account. I am not sure that the comparison you
make is valid.
178. You have explained to us what we perhaps
already know which is that an organisation like Intelligent Finance
does not have the big overheads you do and maybe does not have
a very wide suite of products to offer. I understand that. Could
you perhaps enlighten us as to why the following appears to be
true? When you are on average paying 0.1 per cent interest on
standard current accounts and you are able to get a return on
that money on the present three-month LIBOR rate of well over
four per cent it seems that with your 0.1 per cent on the current
account, whereas in the three-month LIBOR rate you can get over
four per cent, you are making quite a bit on that, are you not?
Is that all eaten up by overheads?
( Mr Goodwin) It is not a question of being eaten
up by overheads, there are costs associated with providing the
service which we provide to the customers.
179. But you are not prepared to say what the
costs are because you do not work them out.
(Mr Goodwin) No, our position is that we do not allocate
our costs across the individual components of our business because
it involves getting into some fairly arcane practices. How do
you allocate the cost of a large branch network, the largest branch
network in the country? Do you allocate it all to personal customers
or do you allocate it to small business customers? How do you
allocate the large cost of the IT platform across customers? It
does not seem to us terribly productive to do that.
3 Note by Witness: The important point to stress
here is that, firstly, there are some 170,000 individual investors
in HSBC who will benefit directly from the shares they
hold. Secondly however there are, in addition, some 17 million
people who benefit indirectly as members of pension schemes
or through Unit linked investments etc. where Trustees of such
investments hold HSBC shares for the benefit of members. Back