Memorandum from Halifax Group plc
1. INTRODUCTION
1.1 The Halifax is pleased to be appearing
before the Treasury Select Committee. We monitor the Committee's
work and value the contribution of its members to the development
of the Banking sector.
1.2 In recent years competition across the
financial services sector has grown significantly, especially
in the Halifax's core areas of mortgages and savings. Elsewhere,
however, in the sector competitive pressures are less pronounced.
1.3 In this submission, we cover the aims
and objectives of Halifax's current strategy and the initiatives
Halifax and its subsidiary companies, notably Intelligent Finance,
are taking to deliver more competitive banking products and services.
2. HALIFAX STRATEGY
2.1 The Halifax aims to grow its business
by maintaining its leading position in mortgages and savings and
increasing its market share in the personal banking market—current
accounts, personal loans and credit cards. This strategy is designed
to deliver real benefits for our shareholders and customers alike.
2.2 Our committment to growing our business
is expressed in a number of ways:
— An emphasis on value for money
products. Our current account (see 3.3) and personal loan
products are deliberately priced to be amongst the most competitive
in the marketplace. Our base rate tracker mortgage is one of the
most competitive in the market, keenly priced at a rate of 5.55
per cent.[1]
Intelligent Finance offers customers the opportunity to minimise
the cost of their borrowings or maximise the value of their savings
through the daily operation of its automated netting system.
— A focus on retention. Halifax
is alone amongst lenders in contacting its mortgage customers
on a pro-active basis to see if they can get a better deal. Over
a million customers have been written to by the Halifax in this
way in less than a year.
— A commitment to straightforward,
government sponsored products. Unlike many in the fund management
industry, for example, the Halifax supported the ISA from its
introduction. The Group is now the largest player in the cash
ISA market.
2.3 In developing new business, it is the
Group's intention to double its share of the current account market
(currently around 6 per cent) over the next few years. We are
convinced that now is the right time to make this move too. City
analysts suggest that the Return on Equity for clearing banks
on their retail banking operations is almost double that of so
called mortgage banks such as the Halifax. This is a tempting
margin opportunity, difficult for the Halifax and its peers to
resist.
3. THE DYNAMICS
OF THE
CURRENT ACCOUNT
MARKET
3.1 All of the available research[2]
suggests that the current account market has the greatest level
of concentration within the banking sector. Despite the fact that
the current account is also the most widely held financial services
product, it also appears to be the most uncompetitive. The Big
Four clearing banks,[3]
for example, control around 70 per cent of the market and typically
pay a standard rate of 0.1 per cent gross pa on balances up to
£100,000.
3.2 This lack of competitiveness presents
an opportunity for the Halifax Group to present current account
customers with a better deal—and make a decent return for
our shareholders. Ours is a two-pronged approach. We are attracting
new current account customers through both the Halifax brand and
Intelligent Finance, a telenet banking operation ie telephone
and Internet banking services.
3.3 Halifax launched earlier this month
a current account that pays 4 per cent gross pa (4.07 per cent
AER) interest on credit balances—over 40 times the rate
paid on balances by the Big Four clearers. This account, deliberately
constructed as a mass market proposition, is designed to appeal
to the majority of customers who like to, in the main, use our
High Street branches while also having the option to bank over
the telephone or Internet.
|
| High Street Provider | Credit Interest
| Authorised Overdraft Rate
|
|
| Halifax | 4.00% gross pa
| 10.00% EAR |
| Barclays | 0.10% gross pa
| 18.80% EAR |
| HSBC | 0.10% gross pa
| 16.90% EAR |
| Lloyds TSB | 0.10% gross pa
| 18.90% EAR |
| NatWest | 0.10% gross pa
| 18.38% EAR |
|
(The Halifax rate applies to accounts funded with £1,000+
per month. The other banks' rates refer to their standard current
accounts where the balance is up to £100,000.
Source: Moneyfacts. Correct as at December 2000).
3.4 Separately, Intelligent Finance's telenet banking
proposition was launched last autumn and offers all of the main
banking products at highly competitive rates. For example, Intelligent
Finance's customers receive a basic rate of 5 per cent gross
pa on their current account credit balances, but through its
unique balance netting system, they also have the option of obtaining
savings rates on these balances and potentially up to 10.5
per cent AER if they elect to use the system.
3.5 The Group's focus on current accounts is driven
by the conviction that the dynamics of this marketplace are changing
rapidly. Our own research, drawn from work we commissioned from
NOP,[4] suggests that more
and more customers are looking for change. In particular, they
are demanding better value for money from their current account
providers.
3.6 This quest for better value may also be driven by
the perception that the main players in the current account market
seem to be enjoying significant returns from this sector. Halifax
research, for example, suggests that the Big Four's 27 million
current account customers could potentially be losing in excess
of £1 billion a year by not moving to our new current account
or the products of some of our peers. This research, some of it
sourced to NOP and some of it drawn from the Cruickshank report,
draws together the potential profits the clearing banks make from
both sides of the currrent account balance sheet—credit
balances and overdraft rates.
3.7 A comparison with the mortgage market may be instructive
here. Ten years ago competition in this sector was relatively
muted and remortgaging was rare. This is no longer the case. Yet
the move to a much more competitive mortgage market has taken
place without any significant evidence of switching barriers even
though transferring a mortgage can sometimes be a complicated
process.
4. SWITCHING CURRENT
ACCOUNTS
4.1 There are obstacles which dissuade consumers from
switching accounts to an alternative provider offering a more
competitive product. They are: firstly, the perceived "hassle
factor" involved in switching accounts; secondly, the actual
hassle factor involved in doing so.
4.2 Things are changing though, especially with the advent
of more competitive products and the development and automation
of the current account switching system. The jury is out on the
new system though for some time yet—at the very least until
all the main players are in the system and it is working smoothly.
That will not happen until some time early in 2002.
4.3 Three years ago Halifax introduced a new paper-based
switching system in its own branches. In autumn of last year Halifax
piloted an automated system for direct debit transfers which was
then launched right across our retail network earlier this month
to coincide with the introduction of our new current account.
Halifax is the first High Street bank to offer this service.
4.4 The Halifax's Current Account Transfer Service (CATS)
employs a dedicated team of around 100 people using new hardware
and upgraded software to ensure that:
— Once customers have signed an authorisation form,
the Halifax will change their direct debits, standing orders and
other regular payments.
— Up until now, customers have had to do most of
the work themselves and typically had to contact their previous
bank, electricity and telephone providers, for example, in order
to complete the necessary paperwork. The CATS team now does all
this for the customer.
4.4 The Halifax system has now been adopted as a model
by the BACS (Bankers' Automated Clearing Service) for the industry
service. Agreement has been reached by all BACS members to provide
account information within 10 working days and automated direct
debit transfer systems by the end of 2001. Further automation
is planned by BACS members to improve the transfer process. All
of the banks say they are committed to joining the system.
4.5 Recent research from Intelligent Finance, who also
provides a dedicated current account switching service, shows
that a great deal more needs to be done to improve the speed with
which some banks hand over the information required for switching
accounts. There clearly are delays and the majority can be attributed
to the Big Four although, to be fair, they do account for the
lion's share of the market.
4.6 This situation should improve over time—but
the Halifax believes that the system should be actively kept under
review by the Government to ensure progress. A failure to introduce
a true level playing field in current accounts would be a significant
blow for those who want the same level of competition that exists
in the mortgage sector to apply elsewhere in the personal banking
arena.
5. CONCLUSIONS
5.1 The mortgages and savings sectors are clearly very
competitive and customers have been reaping the benefits of this
increased level of congestion. Value driven strategies are less
apparent, however, in other areas of the banking sector.
5.2 The winners in the market will be those who realise
that customers are becoming more value-driven and that inertia
is no longer a reliable means of retention.
5.3 Current account customers deserve a better deal.
Collectively the Big Four's 27 million current account holders
are potentially losing out on both sides of the balance sheet
by up to £1 billion per year.
5.4 One of the major obstacles to current account holders'
switching supplier is the perceived length of time it takes and
the actual "hassle" factors involved.
5.5 The BACS Phase 1 and 2 pilots to provide account
information within 10 working days and to provide automated switching
services by the end of 2001 should be kept under close review
by Government to ensure that sufficient progress is being made
by all parties.
5.6 The same levels of competition that exist in the
mortgage sector need to apply in banking services in order to
ensure that all those in the market provide a fair deal for consumers.
25 January 2001
1
Based on 75 per cent of valuation at a 0.45 per cent discount
off base rate. Back
2
Mentioned in Cruickshank, D, "Competition in UK Banking-A
Report to the Chancellor of the Exchequer", March 2000. Back
3
"The Big Four": HSBC, Lloyds TSB, Barclays, RBS/NatWest. Back
4
Halifax commissioned NOP research in which NOP interviewed a
nationally representative sample of 1,000 adults in the UK between
29 September and 1 October 2000. Back
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