Memorandum submitted by the Halifax Bank
of Scotland Limited (HBOS) plc
1.1 The Halifax contributed to the debate
about the provision of banking services when it appeared before
the last Treasury Select Committee Inquiry into banking and the
consumer. Since then, the Halifax and Bank of Scotland have merged
to form HBOS, a leading UK financial services group committed
to providing customers with simple, value for money banking products.
1.2 HBOS believes that the level and pace
of competition across the UK financial services sector is patchy.
In mortgages and savings, for instance, competitive pressures
are very high. Elsewhere, there is undoubtedly less competition
although this is changing, especially in personal current accounts,
and business banking. The mission of HBOS, principally through
the Halifax and Bank of Scotland brands, is to be the main agent
for change in these product areas.
1.3 In this submission, we cover the business
strategy of HBOS, especially in personal banking and business
banking, the two major areas of inquiry for the Treasury Select
2. OUR STRATEGY
2.1 HBOS is committed to growing its business
Consolidating its number one position
in mortgages and savings.
Increasing its market share in the
personal banking market.
Growing its market share in business
banking across the UK and especially in England and Wales.
In building market share, the Group is also
committed to delivering tangible benefits for both shareholders
and customers alike. Value for money products can deliver realistic
and sustainable returns for shareholdersthat is our strategy.
2.2 We measure our successand believe
this should be the model elsewhere in the banking sectorby
focusing on three straightforward variables:
Value for money products
Our personal current account, branded both Halifax
and Bank of Scotland, is deliberately priced to be amongst the
most competitive in the market place. Similarly, Bank of Scotland
has recently launched the first current account mortgage specifically
aimed at the SME sector. Our research shows that combining a mortgage
with a business current account could save a typical SME customer
up to £10,000 a year.
Clarity and Transparency
HBOS, principally through the Halifax brand,
is the leading provider of Cash ISAs in the UK. Our latest published
figures show that the Group is achieving 25 per cent market share
in the Cash ISA segment, double the Halifax's natural liquid savings
market share. Simple, transparent, products clearly strike a chord
Easy product portability
The Halifax was one of the first major banks
to introduce an automated switching system for retail customers
switching their current accounts. Bank of Scotland is the first
bank to introduce a dedicated switching system for business current
account customers wishing to move their accounts. Both initiatives
are working well. Over 100,000 customers have already taken advantage
of the Halifax switching system, for example.
3. THE PERSONAL
3.1 In its fifth report, "Banking and
the Consumer", the Treasury Select Committee emphasised the
importance of the easy transfer of current accounts between banks
by retail customers. The Committee stressed that portability was
therefore essential to increasing competition in personal banking
servicesa view which HBOS very much shares.
3.2 The current account market is changing
for the better, principally because of the products being offered
by the newer entrants such as HBOS. For example, over the last
18 months, principally through the Halifax brand, HBOS has attracted
one million new current account customersa market share
of 22 per cent last year. Our research clearly shows that more
UK consumers are conscious of the valueor lack of itinherent
in current accounts, the most widely held financial services product.
Over 15 million existing current account customers would considering
switching their account to get a better rate of credit interest
according to research from NOP, commissioned by the Halifax. For
customers, a fair rate of interest paid on current accounts is
the most significant product related driver.
3.3 In its Banking Report, the Treasury
Select Committee also highlighted the importance of social bankingHBOS
shares this view. Through active marketing, the Bank of Scotland
and Halifax now have over 2.4 million basic banking accounts.
The Group is, therefore, by far the largest social banking provider
in the UK with a total market share of at least 80 per cent. The
Bank continues to reinforce its commitment to this sector too.
For instance, in conjunction with HM Treasury, the Halifax is
piloting the Savings Gateway product, the only bank to do so.
3.4 The Group also continues to introduce
a number of portability measures designed to make it easier for
customers to switch bank accounts. For instance, the Halifax will
significantly extend the functionality of its existing dedicated
switching system later this month. For the first time, customers
transferring to the Halifax, will be able to go to their local
branch at any time to enquire at what stage the transfer process
is at. It may well be that this measure is adopted by other banks
in due course.
3.5 Enhancing portability, however, is fundamentally
an industry wide issue. The Treasury Select Committee was, therefore,
right to identify switching as one of the most important issues
facing the banking industry. Last November, in a widely reported
move, an industry wide automated switching system was finally
introduced across the UK. Clearly, the new system is to be welcomed,
especially now that the "Big Four" banks are active
participants in it. It is perhaps too early to make a final judgement
on its effectiveness but at this stage a number of points can
The new system does seem to have
encouraged a much higher degree of co-operation between individual
banks, a welcome development.
It is still unclear whether the direct
debit players, a key element of the new service but outside the
banking system, are playing their part.
The Group continues to believe, in
line with its previous submission to the Treasury Select Committee,
that if the new system does not deliver the benefits it is meant
to, the Government should consider regulation of some kind.
Regulation, however, is in HBOS's view, a measure
of last resort. At this stage, HBOS would suggest that the Treasury
Select Committee, along with HM Treasury, keeps a watching brief
on the new system's progress.
4. THE BUSINESS
4.1 HBOS is committed to growing its share
of the UK business banking market, across the UK under the Bank
of Scotland business banking brand. The Group is employing a two-pronged
strategy here too. In Scotland, our objective is to consolidate
our position as one of the country's leading business banking
providers. In England and Wales, using the Halifax's retail branch
network, we are introducing market leading financial products
and services designed to give customers a real choice on the High
Street for the first time. Overall, our objective is to increase
our share of the UK business banking market from 3 per cent to
6 per cent over the next three years.
4.2 Small business customers are eager to
obtain better value for money products. Our research shows that
six out of 10 small businesses believe their bank is making a
lot of money by not paying interest on their current account while
nine out of 10 businesses think they have a right to earn interest.
Contrary to the popular perception, many small businesses also
run substantial balances in their business current accounts. Bank
of Scotland, for example, has made public the average balance
(£10,000) in its business current accounts. It would be interesting
to know the average balances held by small business customers
of the Big Four.
4.3 Bank of Scotland is responding to small
businesses demand for better value by launching a whole range
of banking products. In doing so, it is targeting in particular
the customers of the Big Four who are the dominant players in
this market. In addition to our market leading interest bearing
business current account available across the UK, Bank of Scotland
has also launched a "Free Business Banking Forever"
product initiative as well as a range of very competitively priced
business deposit accounts, an area where the Big Four have traditionally
not been that competitive. Other product initiatives will follow.
4.4 HBOS does not, however, concur with
the Competition Commission's recent decision to introduce price
control into the SME banking market. Our view is straightforward.
On principle, irrespective of the product area, we are opposed
to price control. As a policy measure it tends to stifle innovation
and protect the incumbent's market position.
4.5 The Competition Commission seems to
have taken the view, accepted by the Government, that the market
share aspirations of newer entrants, such as HBOS, are not enough
to provide a genuine change in the intensity of competitive pressure
in the SME banking sector. Perhaps not unsurprisingly, we take
a different position. In our view, the salient consideration is
not the absolute change in market share position per se.
The real issue is the impact that even a relatively small movement
in market share can have on the perceptions of major investors
about the sustainability of the incumbents business models. Even
a relatively small decline in absolute market share for the Big
Four in SME banking, largely driven by the newer entrants such
as HBOS, could lead to a readjustment of their stock market valuations
if their investors became concerned about the sustainability of
their proposition. Therein lies the real competitive pressure
on the Big Four, including the likelihood that they would respond
with better pricing for their customers.
4.6 The Group does clearly, however, welcome
the other main recommendations in the Competition Commission's
recent report. Bank of Scotland will, therefore, work closely
with the DG OFT to play its part in ensuring that transparency
and easy product switching becomes the norm for all SMEs across
the UK. In many respects, the Group is also ahead of its competitors
in this area. For example, prior to the publication of the Commission's
report, Bank of Scotland unilaterally introduced its own credit
history reference. All Bank of Scotland branches therefore have
a straightforward credit history reference which customers can
use if they wish to move to another bank.
5.1 The personal banking market, particularly
the current account segment, is changing, principally because
of various product initiatives by newer entrants, including HBOS.
Better value products are at the heart of this change. So too
is an increased emphasis on easy current account switching although
a final judgement has yet to be made about the efficacy of the
new automated switching system. HBOS suggests that the Treasury
Select Committee keeps a watching brief here highlighting, in
particular, the role of the direct debit players.
5.2 HBOS is also playing its part in the
business banking market, the other major area of inquiry for the
TSC, principally through the Bank of Scotland brand. Our objective
is straightforwardto double our market share over the next
three years mainly by being the only substantive High Street alternative
to the Big Four. We aim to do so by again providing transparent
value for money products that meet the diverse financial needs
of the average SME.
5.3 The recent Competition Commission's
report into business banking has injected a new dynamic into the
sector. Unfortunately, in HBOS's view, the decision to introduce
price control could actually reduce innovation and competition
at the same time. HBOS also believes that the Commission should
have focused on the impact of even small changes in absolute market
share on City perceptions about the sustainability of the Big
Four's business models.
5.4 Finally, HBOS welcomes the other main
recommendations in the Competition Commission's Report and in
many cases is already implementing them. Bank of Scotland will
work closely with DG OFT to play its part in ensuring that easy
portability and transparent products are at the heart of UK business
1 "Bank of Scotland launches first ever offset
mortgage for small; businesses"-Press Release 25 March 2002. Back
"Current account inertia is dead"-Press release 31
July 2001. Back
"A Fair Deal"-Press Release 5 December 2001. Back