Select Committee on Treasury Minutes of Evidence

Examination of witnesses (Questions 20 - 39)



  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 fee—to use your words—of £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.


  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 morning—and I have just heard—would 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.


  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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