Examination of Witnesses (Questions 180
TUESDAY 14 MAY 2002
180. Is this not almost unique in modern management
not to attempt to allocate costs?
(Mr Goodwin) No, it is not particularly unique.
(Mr Ellwood) If you take the average benefit, let
us take Halifax and Abbey National, of the amount they pay on
current accounts, it is less than £1 a month after tax. It
is really apples and pears. For less than £1 a month customers
at Halifax and Abbey National cannot pay bills over the counter,
if they pay in less than £1,000 a month the interest rate
drops dramatically, they cannot withdraw less than £300 cash
over the counter if they are a Halifax customer, they do not have
access to over 2,000 branches, they have 1,100 with HBOS and 700
with Abbey and if they pay in less than £250 per month they
will be encouraged to move to another account. If you look at
the benefit they get, say £1 per month, then you look at
the benefits some of us offer, which are different, things like
30-day purchase protection, things like direct debit benefit cover
for accident and sickness, which we reckon are worth £2 per
month, it is a slightly different offer, that is all. We do that
against the background that when we ask our customers what is
important to them, pricing is eighth most important. This is our
customers telling us that.
(Mr Goodwin) Very significant numbers of customers
pay us each month to have a current account because of the functionality
which is offered. That is the biggest growing constituency within
our personal customer base.
(Mr Barrett) The points being made are that you will
find differences in price in a normal contestable market. Given
that there have been a few advertisements thrown in here, let
me try one. If you take our Open Plan account, which offsets deposit
interest and savings interest against a mortgage, the benefits
to consumers are in the thousands of pounds a year, not £12.
We have 1.2 million people signed up for that and it is growing
at the rate of thousands a week. That is an offer we put in which
frankly trivialises the interest on current account which is offered
by a competitor. This is a market which is alive and well. You
will always find differences in prices. In the end the customer
will vote with his or her feet and the customer isI say
againmore sophisticated than I believe they are often given
credit for in these commentaries.
181. May I try to prick this bubble of complacency?
The Which survey said that less than one third of current
account holders with you four, if they were starting again, would
choose an account with any of you. All the evidence which has
been put before us suggests that it is just inertia that keeps
your customers with you.
(Mr Goodwin) We grew our personal customer base.
182. You are telling us with great pride, excessive
pride and excessive profit, that your customers are all happy,
but the Which survey says that less than one third would
start again with you.
(Mr Dalton) There is always an opportunity for a survey
to make a point. I can say with excess pride, but not with excess
profit, that I think maybe there is something to be said for the
fact that there is no competitive advantage, or no commercial
advantage in inertia. It is to our advantage to encourage switching.
Maybe we are all ignoring the fact that if 94 per cent of our
customers say they are satisfied or very satisfied we simply do
not accept that. The fact is that is the research we have and
the fact is that every bit of research we see says they are satisfied.
We do not seem able to accept the fact that the customers are
183. Which says they are not.
(Mr Dalton) One survey; I can give you 50 which say
184. So you are saying to us that it is a dud
(Mr Dalton) I do not know; I have not seen the survey.
I am telling you that I can give you 50 surveys which say they
are. You give me one which says they are not, in fact one particular
statistic out of one survey which says they are not. I am sorry,
but the surveys say the customers are happy. I am delighted to
185. A question which I hope will elicit a one-word
answer from each of the four of you. On the issue of inertia,
about 70 per cent of the current account market is accounted for
by your four banks. One of the big issues was the speed with which
direct debit information was provided to a switchee bank, a switcher
seeking to move. The figure is five working days for information
on standing orders and direct debits to be provided by each of
your banks. Could you tell me in a one-word answer what proportion
of switching enquiries in relation to each of your banks is met
within the five-day Banking Code guideline? Give me the number.
(Mr Dalton) Ninety-five per cent.
(Mr Goodwin) Ninety-nine per cent; 99.8 per cent for
the Royal Bank and 99.7 per cent for NatWest.
(Mr Ellwood) One hundred per cent within three days.
(Mr Barrett) I'll see your 100 and raise you!
186. Do I take that to be 100 per cent, Mr Barrett?
(Mr Barrett) Yes; it is 90 per cent plus within three
187. Thank you. That is on the record now.
(Mr Dalton) We shall not let our competitors have
higher rates; we shall work to increase our 95 per cent.
(Mr Goodwin) The number of people we are talking about
where there is non-compliance is in single figures. I do not want
anyone to leave here today with the impression that there are
tidal waves of people leaving. We grew our personal customer base
188. Mr Barrett, we can take it that your figure
was not over 100 per cent.
(Mr Barrett) No.
189. We have just heard of a baffling array
of products. It is impossible for people to choose between them
and I do not think people are as sophisticated as you allege,
particularly not young people. Is it reasonable for banks to engage
with schools to help young people understand the banking system?
Would that be an opportunity for selling?
(Mr Barrett) Yes.
(Mr Ellwood) Yes.
(Mr Dalton) For selling?
190. Yes; selling.
(Mr Dalton) Let my colleagues speak for themselves
but we feel a very big responsibility to help young people learn
about financial matters. We do many things in that regard. The
principal one is that we are major sponsors of Young Enterprise,
which teaches children about business and financial things. We
are working with the FSA on education for young people. We operate
something like 1,400 school banks across the UK. We are very keen
on making sure that young people understand both the responsibilities,
obligations and pitfalls of financial activities.
(Mr Ellwood) We do very similar things but the point
is absolutely valid. We need to work harder at education and making
sure that people do understand what we are offering.
191. Including the opportunity to switch.
(Mr Dalton) Yes.
(Mr Ellwood) They already have that.
192. May I turn to the Lloyds TSB memorandum?
You say that of the 100,000 basic bank accounts opened so far
69 per cent are loss-making because the balance is less than £1,000.
Can you confirm that? Can you tell me whether you hope to make
profits from these accounts in some other way?
(Mr Ellwood) I can confirm that. I can also tell you
that the average balance on those accounts is some £250 compared
with an average balance for classic accounts of about £1,250.
At the moment we do not make a profit from the basic bank accounts.
If we get our normal market share of basic bank accounts over
the course of the next year or two, we would estimate that we
would lose several tens of millions of pounds from operating them.
We think it is very difficult to cross-sell sufficiently to basic
bank account holders to make a profit. We do accept entirely that
we have an obligation here both to support the Universal Bank
and to provide banking facilities to basic account customers.
193. Are other customers' charges higher than
they would otherwise have been in order to pay for these guys?
(Mr Ellwood) No, not at all. Some 80 per cent of our
current account customers do not go overdrawn and do not pay any
bank charges. The hit to the organisation is to the shareholder
rather than to other customers.
194. But I am reading directly from your submission,
paragraph 7.3, which says "... these accounts are in practice
being cross-subsidised by other customers".
(Mr Ellwood) Essentially the ultimate bearer of that
subsidy is the shareholder.
(Mr Barrett) It is a fair point that within a very,
very large customer base, there are customers who are loss-making,
so to that extent there is inescapably an element of cross-subsidy
in that if one's overall profitability is acceptable then you
live with that because you also have obligations to the country
in terms of financial inclusion, etcetera, which we support. It
is a fair comment to say that if you were to micro segment any
of the customer bases you would find significant percentages,
some that would surprise you, of certain sectors which looked
at on a stand-alone basis you would not enter as a business, including
by the way the current account. If you looked at current accounts
as a business, you would never enter the business because it does
not make any money.
(Mr Ellwood) It depends on the timing to some extent
as well. If you are looking at the student account, clearly most
student accounts initially do not make any money at all but in
later years they invariably do.
195. Why were you not opening these accounts
before? Why have you waited to be pressed into fulfilling the
obligations to the country in terms of social inclusion?
(Mr Ellwood) We agreed to support the Universal Bank
with quite considerable sums of money and we have been opening
accounts to a greater extent than practically anybody else for
the lower socio-economic groups and we have been doing that for
many, many years.
196. It strikes me that what is going on here
is a transfer from customers and shareholders to groups of people
identified by the Government and the shareholders and customers
are being given no effective say in the matter. Is that not akin
to a tax?
(Mr Goodwin) There are two separate issues.
(Mr Dalton) In the whole business here about banks
and profits and charges, it has to be remembered that there are
only three sources of any kind of levy or imposition or charge
on the banks. It has to come from the shareholderswe have
17 million who are holding shares in their pensions and so onfrom
the customers or from the staff. There are only those three sources
of any levy or charge on the bank. The banks do not have pots
of money which do not belong to one of those three groups. Whatever
happens, one of those groups is having to pay for something.
197. Therefore this is a form of tax and it
is a form of stealth tax which has been imposed upon you by a
mixture of coercion and regulation.
(Mr Barrett) That is an interesting analogy. If you
take the Competition Commission's report which wants a remedy
which will transfer money out of the pockets of shareholders,
it is a tax on shareholders by any other name. Unless one can
point to abusive behaviour, then it is an arbitrary and quite
extraordinary intervention into a market economy and it is de
facto a decision by the Government to disadvantage the pension
fund holders to the benefit of small business who did not want
it to begin with.
(Mr Goodwin) There is a distinction to be made between
basic bank accounts and Universal Bank. Earlier I sensed that
we were being criticised for not allocating costs. Part of the
philosophy in not allocating costs takes us to a point which says
that it is in our interests to have as many customers as we can
unless we are actively losing money out of the door. So we have
a model which is inclusive. We have been opening accounts for
people in these groupings over the years. We have now formalised
the process and made the process easier for them and have advertised
on television that we have these accounts available. Philosophically
we are very happy to have them in the belief that financial exclusion
benefits no-one and that the more people who are part of the system,
the more actual customers for us now and the more potential customers
in the future. In that respect it is almost a form of marketing
spend and it is an investment for the future. Universal Bank is
slightly different because that is not producing anything which
is not capable of being delivered through the bank accounts.
198. Universal banking, as I understand it,
is generating a public expenditure saving for the Government,
it is a transfer of a financial liability from the Government
to banks. In the normal course of affairs I posit to you as a
suggestion, would one would expect a Government to say they want
you to perform this function and "here is the cheque for
it"? In this case are you not being asked to do it and absorb
it either through your shareholders or your customers?
(Mr Ellwood) We are to a very large extent. What we
are saying is that we are very happy to play our part in serving
the community in this way with support for the Universal Bank,
but accepting that it is an absolute direct cost. We are not going
to manage these accounts, we are simply going to fund them.
199. Therefore this is a one-off tax on banks.
(Mr Ellwood) Yes; to a large extent.
(Mr Dalton) HSBC operates in 80 countries
and many countries like the UK have desired to mechanise the benefits
and payments of the Government. In most of the countries I am
familiar with, the process has been for the Government to come
to the banks and say they want to mechanise the payments process,
ask how to do it, what it would cost them to do it and how much
they could save by doing it. In the UK we did not do that. We
decided to do it through the Universal Bank and the banks have
contributed significantly to the setting up of that bank.
(Mr Barrett) There was an agenda going
on beyond the strict implementation of it. This was also tied
up with the crisis at the Post Office and by automating payments
a major revenue source for the Post Offices was being "disintermediated"
by the Government's initiative and therefore the attempt was to
put more product into the Post Office at our expense. I think
the Government had an objective also of trying to prop up and
help the Post Office, unfortunately at our expense. Given that
the Treasury were saving £400 million a year by shifting
to automated benefit, they could have bellied up to the bar a
little more vigorously themselves.
4 Note by Witness: Peter Ellwood was seeking
to make the point that it would be possible, if one were so minded,
to perceive the Universal Bank as a one-off tax on the banks.
However, this is not, nor should it be taken as representative
of Lloyds TSB Group's view of the Universal Banking Services scheme.
On a number of occasions, and in paragraphs 192 and 277 in particular,
Peter Ellwood clearly outlines the Lloyds TSB Group's stance on
the Universal bank. Back