Examination of witnesses (Questions 20
- 39)
TUESDAY 18 APRIL
2000
MR MATTHEW
BARRETT, MR
BILL DALTON
and MR PETER
ELLWOOD
20. Do you recognise his description of the
system as anti-competitive, slow, inflexible, opaque, a barrier
to innovation?
(Mr Ellwood) It is certainly slow. I do not believe
it is anti-competitive but it is certainly slow and there are
faster systems in the world. It is this question of the cost of
putting equipment in so that the cheques do not have to move physically.
That has been one of the reasons why we have not moved to same-day
clearance in the past.
21. Let me try Mr Barrett again on this. You
are making enormous profits. Why is it so expensive to modernise
the system?
(Mr Barrett) We are investing enormously in modernising
the system and that will continue for the next several years at
an accelerated pace. There is a massive transformation going on
in the industry from paper based physical distribution to electronic
based distribution. Electronic signatures, imaging technology
will replace some of the problems my colleagues were referring
to. I might just add that all things are relative. I am not saying
the system cannot be improved; that would be a ridiculous thing
to say, of course it can. It will be and we are investing. One
of the things is that the actual paper processing side of banking
is really quite a commodity and I would argue for a more cooperative
set of ventures between the banks so that the economies of scale
derived from this kind of item processing, can be invested faster
in the new technologies to make it better and you will see that
happen literally in the next 12 months.
22. Would you not accept that keeping going
this cosy Victorian paper system is a surreptitious way of making
more profits out of your customers?
(Mr Barrett) On the contrary, if you take the discontinuities
which are in the system at the moment, consider that two years
ago there were no internet bank customers, today we have 800,000
in Barclays. Two years ago there were no telephone banking customers,
today there are 1.2 million. There is an enormous shift going
on, driven by customer demand and customer behaviour. We are responding
to it. We have the challenge of making the transformation to the
new economy and the newer alternative access channels and preserving
traditional physical distribution which is, as we have seen recently,
much loved but there is enormous change. There are few industries
in the world transforming quite at the speed banking is, to take
advantage of new technologies. I would not criticise the UK. I
frankly came to the UK expecting it to be farther behind North
America in this area. I would say in some aspects it is a little
behind, but I would say it will have full catch-up within the
next two years. The UK has actually a much better banking system
than it seems to be given credit for in the UK.
Mr Beard
23. How do you justify charging customers a
disloyalty fee?
(Mr Ellwood) May I start by talking about Automated
Teller Machines (ATMs), the cash machines you see in branches
and so on, because your question needs to be put in the context
of ATMs generally? If you look at Mr Cruickshank's own analysis
of ATMs that report shows that with one exception the UK is the
cheapest country for ATM transactions of all the countries studied
by the review team, including the USA, Canada and Australia. Today
in Lloyds TSB 96 per cent of our customers' ATM withdrawals do
not incur a charge; in almost all cases involving the four per
cent of our customers where we do levy a charge, which is the
area you are referring to as the disloyalty charge, the customer
has access nearby to "a free machine", free in that
there is a group consisting of Barclays, Royal Bank of Scotland,
Bank of Scotland and ourselves. Therefore for these customers
who have elected to use a machine outside that, convenience is
particularly important. Just to try to put this traffic in context,
the ATM traffic is about two billion debit transactions going
through the ATM system annually. Half of those use the card holder's
own ATM and half of them do not. Essentially what we have now
agreed through the LINK organisation, where there are 34 members,
is that double charging is unanimously out; everyone agreed that
double charging should not be permitted. That was one of the earlier
issues about charging with ATMs. We actually have a code of conduct.
The main points of this code of conduct are that no customer will
be double charged; that is going to be the same for all LINK members
a month or two from now. None of our customers will be charged
for using the 4,400 machines which we own; that is the largest
network in the United Kingdom. From 1 January next year, we will
levy a charge on non-customers who use our machines. We believe
that it is quite legitimate for non-customers to pay a modest
fee for the use of our machines. Our machines cost roughly £50,000
to buy and instal but where there is this charge for non-customers,
it will be set at one price, irrespective of location, so that
people in remote and rural areas are not disadvantaged. From 1
January, that charge for non-customers will be 50p per withdrawal.
This will enable us to make a very small profit on the cost over
the ATMs. We think that is quite desirable, that it will inter
alia encourage new competitors to come into the ATM marketplace
in the same way that happened in the States, where a charge of
US$2.50 is frequently levied. Only a small number of people pay
our current disloyalty feeto use your wordsof £1.50
per transaction, but that will not be applicable after 1 January
2001; it will have gone by the end of this year as we move into
a new method of cost and price for ATMs. We believe this new approach
we are going to introduce is fair, we believe it is reasonable
and we believe it is transparent. The issue you raise is of a
short-lived nature and by the end of the year we will not be charging
disloyalty fees.
(Mr Dalton) We have about 7,000 ATM machines which
our customers use with no charge and 85 per cent of our transactions
are done on those machines. For the 15 per cent which are not,
they choose to use the machine of another bank, we levy a £1
charge. In cases of areas where there is no access to the no-charge
machines, we waive those charges. We now have on our screens a
notice which says that your bank may charge you for using this
machine but we shall not and we never intended to do any double
charging. We are studying whether to move on 1 January to charging,
a process which allows our customers to use that network of 7,000
machines with no charge. We have not determined the amount of
charge yet for the customers of other banks to use our machines.
We would make sure of course that before the transaction takes
place the amount of the charge is notified on the screen. That
is our position on ATM charges.
24. You have no plans such as Mr Ellwood has
announced for changing that.
(Mr Dalton) We shall change to a situation in January
where we shall institute not a disloyalty charge but an acquirer
charge.
25. That is the same thing. Will it be for the
same fee?
(Mr Dalton) We shall use the same process. We have
not decided our fee yet.
Chairman
26. Is that a new announcement, Mr Ellwood?
(Mr Ellwood) It is. It will be announced today.
27. Did your competitors know about it?
(Mr Ellwood) Absolutely not.
28. They are surprised, are they?
(Mr Ellwood) I imagine so.
Mr Beard
29. I am on the subject of surcharges and why
you find it fairer to surcharge people.
(Mr Barrett) We were the first in the country to sponsor
the total elimination of disloyalty charges and they are already
gone; they do not exist at Barclays.
30. I realise that but I am asking why you find
a surcharge preferable?
(Mr Barrett) I find a user fee for non-customers reasonable
in order to provide an incentive for people to increase the number
of remote machines, that is beyond those physically contiguous
to their branches and there has to be an economic return in order
to invest in those machines. As Mr Ellwood said, if you look at
the experience of this happening in North America, the number
of machines doubled and the price fell. When Barclays sponsored
a change, for which we unfortunately received a lot of flak, we
were promoting transparency and pre-notification, we were promoting
the elimination of disloyalty fees and we were acknowledging that
there were free riders on the system who were not investing for
the convenience of their own customers and who were not investing
in the network generally. We wanted to provide an incentive for
other people to add to the machine network and we hope to get
an economic return in doing so. We said in our proposals to do
that, that price competition, which you have just heard this morningand
I have just heardwould drive down the cost of user fees
between competing institutions. We also sponsored and still agree
that you should allow in third parties; the ATM providers who
are not necessarily financial institutions but who do it as a
business. The net result of the market dynamics of that would
be more convenience and lower price, better pre-notification,
more transparency and better service for the customer. We think
we took a right sided view on that.
31. You are suggesting that the fee is at a
reasonable level.
(Mr Barrett) We have eliminated disloyalty fees. I
did not feel they were reasonable at all.
32. I mean are your surcharges at a reasonable
level?
(Mr Barrett) Any commercial enterprise sitting down
to establish price tries to make a judgement on the value of that
and how it will be perceived as a value proposition in the eyes
of customers and then you let the market decide, based on competition,
where that price should end up nesting. I would say at the moment
I have just heard one of my competitors upping the ante and that
will be a factor in competition down the road.
Chairman
33. He might be lowering the profit, not upping
the ante.
(Mr Barrett) Maybe; maybe, but hopefully the volume
will go up.
Mr Beard
34. Your surcharge at the moment is one pound,
whereas Mr Cruickshank quotes independent analysis commissioned
by LINK suggesting that the average cost is 30p, indeed the marginal
costs are only 15p. There is a very big difference between the
two.
(Mr Barrett) This is an element of the report which
I do not frankly understand from a technical point of view. I
do not know what the relationship between cost and price is. I
do not know the cost of anything I buy. Price is a function of
the interaction of competitors and rivals in the market and customer
behaviour, not a function of cost.
35. Your chief executive of retail financial
services was quoted as saying that a fee of one pound was reasonable,
but he said it was still only sufficient to recover about 25 per
cent of your costs. Why then is your analysis in Barclays so much
at odds with the analysis that Mr Cruickshank quoted? There is
a very big gap there.
(Mr Barrett) I think Mr Cruickshank quoted about 30p.
36. He did and that is on the high side.
(Mr Barrett) If something costs 30p and you charge
a pound for it, is the point that that is excessive?
37. The point is that your chief executive of
retail financial services said that even at one pound you were
only covering 25 per cent of the costs whereas Mr Cruickshank
is saying that 30p covers all of the costs.
(Mr Barrett) I cannot square those two. I shall get
back to you on it. I do not know the context within which the
quote you are referring to was made.
38. Perhaps you would write to us on that.
(Mr Barrett) I shall; I shall come back to you on
it.[1]
39. Mr Dalton, could you explain and justify
why the loyalty fee you have been charging is so much in excess
of what Mr Cruickshank says would cover the costs?
(Mr Dalton) We have not decided what
our charge will be in January. We are now charging one pound for
our customers using these machines.
1 See p 17. Back
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