Examination of Witnesses (Questions 306
TUESDAY 30 JANUARY 2001
306. Cruickshank made a number of recommendations;
do you think that there have been any changes in the banking scheme
as a consequence of those recommendations? Who would like to answer?
(Mr Williams) We have seen certain moves
in the area of financial inclusion and all the banks have taken
initiatives and Cruickshank had certainly passed comment there.
Some of the matters still need to be worked through. Of course,
the Competition Commission is in full flow, looking at small business
banking, and Cruickshank's other major recommendation on PayCom
has not been adopted and we wait to see the OFT take up its position.
(Mr Head) From our point of view, he has increased
awareness in the market which is good. I think that customer inertia
is the biggest problem rather than lack of competition.
307. Can you explain what you mean by customer
(Mr Head) What I mean by that is that, on the supply
side of the market, you have the four clearers, you have the building
societies, the converted societies, you have the banks that are
provided by the supermarkets, you have the new entrants. There
are a huge number of players competing in that space. I think
customers have viewed the market as being pretty homogenouswhat
is the point in switching?and that the Cruickshank report
has increased public awareness about there being a choice, so
I think that it has had a good effect from that point of view.
(Mr Goodwin) I agree that there have been a number
of effects, most of which have been described there. If we look
at financial inclusion, for example, I think that was rolling
before Cruickshank. I think there may have been an element to
which there was a catalytic effect in Cruickshank but I think
a number of initiatives in relation to financial inclusion have
their genesis before then. A number of changes in the marketplace
in the form of new competitors have their genesis before Cruickshank
but Cruickshank may have had a catalytic effect and I think perhaps
covered PayCom in the Competition Commission.
(Mr Crosby) We are still awaiting the results of the
competition inquiry into small business lending but, more than
anything else, I think there is a much greater awareness right
across the industry and industry observers regarding the need
to improve the competition in the money transmissions systems.
308. Mr Goodwin, the Consumers' Association
told us that there are plenty of providers for banking services
but that the better ones are not finding their way through to
the retail market; why is that?
(Mr Goodwin) I am not sure that I can really accept
the premise unless you know who the better ones are that have
not found their way through to the market.
309. At the moment, the Big Four have 70 per
cent of the market a year after Cruickshank reported. Nothing
has changed, has it?
(Mr Goodwin) Some new entrants have come in to various
parts of the market and market shares have moved amongst the Big
Four. NatWest, for example, is regaining market share which it
had been losing steadily through the 1990s. So, if you are perhaps
taking the Big Four as a totaland I have not seen any up
to date information on the Big Four to confirm the 70 per cent
figureI think that changes tend to happen reasonably slowly.
Cruickshank has been around for a little time now but, in terms
of the overall evolution of those market shares, it has not been
around a long time. I am also not sure about the premise which
says that the Big Four are not amongst the best at providing money
transmission which was implied by the question. I am not sure
who the people are who have not been able to break through yet,
so I do find it slightly difficult to respond to the question.
I do not know if you have any of the details of the ones who are
not able to break through because then I would be better able
310. You are trying to break through, are you
(Mr Goodwin) In NatWest we are. We are trying to regain
market share. I do not know if you would call that break through
or not. We would regard it as a break through to have arrested
declining market share.
311. Presumably you are trying to protect your
position against new entrants as well.
(Mr Goodwin) We are trying to compete in the marketplace
against everyone that is there. We need to grow our customer numbers,
whether it be at the expense of our competitors in general as
opposed to just the new entrants.
312. Are you in favour of encouraging more competition
between the banks?
(Mr Goodwin) I think there is quite an intensive competition
amongst the banks, particularly in the personal arena. One of
Cruickshank's own conclusions was that there is plenty of competition
amongst the banks in the personal arena.
313. Do you think there is sufficient competition
at the moment?
(Mr Goodwin) There is plenty of it. I do not know
that much more would be very sensible in terms of competition
but there are new entrants coming into the market. I do not know
what measures of competition you would be applying to think about
what more might look like. There seem to me to be plenty of providers
and plenty of competitors in the marketplace just now.
314. If the Big Four had 70 per cent a year
ago and the Big Four still have around 70 per cent today, then
competition has not increased.
(Mr Goodwin) I do not think that is how you would
measure competition. The existence of competition and the existence
of a group of players who have quite a large market share are
not mutually exclusive.
315. I understand that, but you are confident
that the present system is sufficiently competitive?
(Mr Goodwin) I think it is highly competitive.
316. Let us turn to you, Mr Crosby, at the Halifax.
You said in your submission to us that the return on equity for
the clearers is almost double that for the mortgage loans and
you describe this as a tempting margin opportunity. Does that
mean that you want to make the same return on equity?
(Mr Crosby) No, I do not think it does. I think what
we are saying is that you can see a very different approach. We
have lived, over the last five years, with the development of
very intense competition in our core mortgage and savings markets,
something that was endorsed in the Cruickshank review. I would
say that our strategy is about trying to create some of that same
competitive intensity in some of the core banking products and
we do that by offering really good value products and competing
head on, and illustrations of that would be some of our personal
loan products but most obviously the 4 per cent current account
that we are offering, by far and away the highest paying current
account on the High Street. So, while we will make returns to
our shareholders, I can assure you that that is not aiming to
generate anything like the same sort of returns as a clearing
bank will do in their core retail banking businesses at the moment.
317. Then it is not a tempting margin opportunity?
(Mr Crosby) Yes, it is. It is an opportunity to make
sensible returns and achieve the right sort of trade-off between
our customer and our shareholder interests. That is not the same
as necessarily making the sorts of returns that the retail banks
are making at the moment.
318. So, if you think it can be done better,
presumably you do not think the present state of competition in
the banking market is satisfactory.
(Mr Crosby) We pay, on average on all savings accountswe
are the largest savings franchise in the UKin excess of
5 per cent, on balance on average. Nowadays savings accounts have
cards and all sorts of facilities and there is not as great a
difference between them and current accounts as there once was.
We think that the gap between five-and-a-bit and 0.1 per cent
is unsustainably large and we look to the future of automated
clearing systems to break down customer perceptions of inertia,
of the difficulty that people perceive in moving accounts. We
look to that to be the catalyst for breaking down inertia and
building more competition into the retail banking market.
319. I am quoting from your evidence, that the
Big Four control about 70 per cent of the market and typically
pay a standard rate of 0.1 per cent gross. You do not regard that
as satisfactory, do you?
(Mr Crosby) I do not regard that as an accurate representation
of competition, no. I think we can compete more effectively and
still make money.