Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 160 - 179)



Kali Mountford

  160. Mr Barrett, you just said you are in the business of raiding each other's business and I think Mr Goodwin said that tens of thousands of people change their accounts. How many people stick with you? What proportion of your business is stable?
  (Mr Barrett) The propensity to switch in the business is probably 15 to 20 per cent, but if you are giving very high satisfaction levels, then people do not have a reason to switch. Our satisfaction levels are in the 90 per cent in this particular sector, so we have a pretty robust franchise of which we are quite proud.

  161. You are basing your business on a level of satisfaction that you think is perceived. What about the rest?
  (Mr Goodwin) As with all parts of our business, we focus on what our customers want. If you look at the development of this business, we focus very hard on what our customers want. We would consider a large part of our customer base to be broadly stable, because they are satisfied with our service. If at any point you let them down on that, then we will lose those customers. That is the premise on which all of our business is built, keeping our customers satisfied and adding value for our customers.

  162. Is there not a customer mind set of stability in banks? Is it not the case that if you get a customer young they will tend to stick with you.
  (Mr Ellwood) Yes, they tend to, but one of the things we do every month is speak to 20,000 personal customers and we ask them how they rate our service. Ninety per cent say they rate it satisfactory or very satisfactory. One of the reasons we have a lot of "stickability" is that the vast majority of these personal customers do not pay for their bank accounts. About 80 per cent of them, if they stay in credit, simply do not pay. They are getting something which is free, there is no commitment, there is no obligation on their part to buy any other product, so a certain degree of stickability is perhaps not surprising.
  (Mr Barrett) It is changing though. In the spirit of candour I would say that the inertia of the customer was traditionally quite pronounced in the UK versus my experience elsewhere. The good news is—believe it or not I believe it is good news for us as well—that complacency is out, the propensity to switch is increasing, customer demands are increasing and we have to up our act or we are going to lose the business either to the fellows across the street or new entrants. Everybody wants to eat our lunch. It is not the old days. Despite popular perception the problem is one of definition. People say that banks dominate banking. By definition they do. But there are many non-bank providers, there are many product specialists, there are many mono-line players. What you are finding is an increasingly demanding consumer, driven by greater sophistication of the consumer, driven by an aroused media, driven by the political climate of increasing consumerism. I personally regard that as a positive development because it will force us all to up our game. Is there room for us to up our game? Yes. I would concede that historically the customer in general in the UK—if I may be so bold—is long-suffering but it is changing very fast.

  163. Which part of the market would you see you need to aim that at most? Switching accounts or new young people, new into business, new out of school, new bank accounts.
  (Mr Dalton) It is important to aim at both because one of the jobs we have in terms of our businesses is to grow our customer base. In our case, we aim at both: new customers, young customers and switching customers from other banks. It has to be remembered that there is no competitive advantage in inertia. It is to our advantage to eliminate inertia and to encourage switching because we all think that if we can do that the customers will switch to us.
  (Mr Ellwood) We are seeing a lot more switching in things like credit cards now; maybe in excess of 200,000 card customers move from one supplier to another. Certainly that is our experience in the space of one year. It is a highly competitive market and there are 65 suppliers of credit cards, 130 suppliers of mortgages, over 30 suppliers of current accounts. It is beginning to move. I agree that we are seeing a higher number of people move from one supplier to another. We applaud that because the people who offer the best service will win out on it.

  164. Given the importance of the credit card industry in switching accounts, how important is it that you aim advertising of credit cards to young people, just-18s?
  (Mr Ellwood) It does not make any sense for us to advertise to any group of people if it is going to create a high level of credit risk, where it is not good for them and it is not good for us. We are very, very conscious of the responsibilities we hold in areas like that but also we want to make sure we give people the relevant products they need.

  165. Do you all share that view?
  (Mr Dalton) Yes. It is fair to say that most of us would agree that if you have happy customers you will have a successful business. We work hard every day to make sure that our customers are happy and the research we do—we ask our customers and that is a good thing to do—tells us that they are. We understand that happy customers mean good business.

  166. Did Mr Barrett have a different view?
  (Mr Barrett) Was your question on credit cards for the young?

  167. Yes; I am very concerned about that.
  (Mr Barrett) Credit-worthiness is an issue. I am in favour, under a controlled careful basis, of providing low limit credit card capability. It is a safety issue. As a parent, this is how I feel about it. You would not exclude anyone in terms of their willingness and ability to repay. You have to be careful in extending the keys to unlock credit. We are very interested in tapping into the youth market. You are right, the net present value of a baby in the cradle is quite attractive. If you can recruit the whole family and the children and everything else, it is very good business over a lifetime. I am interested in them all.

  Chairman: Happy customers from Mr Dalton and long-suffering customers from Mr Barrett.

Mr Ruffley

  168. For the last year the calculation has been done that the Big Four retail banks made profits on personal banking services equivalent to £539 for every one of the United Kingdom's 19 million households, which is equivalent to over £28 million a day, over £1 million an hour, which equates to over £20,000 per sixty seconds. Could I just ask each one of you very quickly, because we are short of time, what your answer to the following question is? When a constituent of mine, average man or woman in the street, says those are excessive profits, the retail banks are making too much profit, is that man or woman talking complete nonsense?
  (Mr Dalton) I would not want to suggest that anyone was talking complete nonsense.

  169. So there might be something in what they are saying.
  (Mr Dalton) I did not say that either.

  170. Is it complete nonsense? Is there no shred of credibility in that proposition?
  (Mr Dalton) I am happy to answer the question. I would not suggest that they were talking complete nonsense. What I would suggest is that some of the facts are incorrect. The numbers you have calculated are all very good and easy but you have missed one and that is the capital which was required to earn those profits. That capital is represented by the shareholders of the banks and we figure that we have about 170,000 people who entrust their money to us as shareholders and about 17 million who entrust their money to us, their pensions to us as shareholders and hold shares in the bank through various means. If you look at it from the perspective of our £3 or £4 billion in the case of our bank, or somebody else's bank £1 million, a day or a second, fine, those are very interesting numbers and very dramatic numbers, but you are missing one number which is the capital calculation. We think that the return we earn on our capital for our shareholders is demonstrated to be a reasonable return as compared with other industries in the UK, as compared with other banking systems across the world. That is my answer.[3]

  171. To sum up: you are saying there is no such thing as an excessive profit and members of the public who say there is are talking complete nonsense.
  (Mr Dalton) I did not say that at all. I am not saying there is no such thing as excess profit. I am saying the level of bank profits as currently in the United Kingdom are not excessive.

  172. I am grateful. I am just trying to expose your thinking or flesh it out. There could be such a thing as an excessive profit.
  (Mr Dalton) Yes, there could be.

  173. How might that arise? Has it ever happened in relation to your bank?
  (Mr Dalton) Not that I am aware of, no.

  174. Do you think it has happened in the profits any other banking institution has made recently?
  (Mr Dalton) Not that I am aware of.

  175. What might an excessive profit look like? What might it be defined as?
  (Mr Dalton) An excessive profit might be if you invest one pound and earned £500 million on it. That might be excessive.

  176. It is not something that banks in your experience in relation to personal banking have ever done.
  (Mr Dalton) That is correct.
  (Mr Barrett) Clearly the stock market does not think so or they would not have a PE ratio which is half the FTSE. If banks were as profitable as everyone seems to think they are, I am wondering why it is not reflected in the market value of the banks.

  177. I am just trying to put to you what the ordinary man or woman in the street might think. May I move on quickly to this £500 million rip-off figure that Which have produced today, which I am sure you are very familiar with? May I just ask this? Their proposition, which is backed up by all the evidence we have heard in this Committee before today, is that on average the Big Four pay 0.1 per cent interest on standard current accounts' credit balances; that is just an average figure. That compares with an average with the new entrants of more than three per cent. In relation to the best overdraft rates the best ones you can get outside the Big Four are less than nine per cent. The Big Four charge up to twice this on overdraft rates. In current account credit balances and overdrafts you are way adrift, there is a yawning gap with new entrants. What I should just like to get a feel for is why there is that big yawning gap? Could you explain that to us?
  (Mr Goodwin) Yes, I can certainly attempt to. First of all you are not comparing like with like in terms of products. That is the most fundamental point. In return for the current account offering which we provide free of charge to customers, it is clear that some products get a rate of interest which is less than some of the new entrants. Even when you start to look amongst the new entrants and you ascertain that a number of the more publicised ones have requirements for you to deposit a certain amount each month, if you do not meet that, you revert to terms very similar, funnily enough, to those of the people you are talking to today. A number also make higher charges for borrowing and require a regular fee. So the comparison is not as straightforward as you make it. Keeping it at a high level, very few of the new entrants offer branch networks, which we offer, the ability to interact with the bank by telephone, the ability to use our ATM network. We offer a service which is different from that offered by new entrants. The ability particularly for small businesses to come in and have cash handled in the branch or to come in and meet their relationship manager is not offered by many of the new entrants. It is also the case that we offer a suite of products to our customers which includes savings accounts, deposit accounts. I go back to a comment I made earlier. A money transmission account is not the best place to keep your money if you want to earn interest on it. We have available automatic sweeps which enable people to have balances taken out of their current account and put automatically into a savings account. I am not sure that the comparison you make is valid.

  178. You have explained to us what we perhaps already know which is that an organisation like Intelligent Finance does not have the big overheads you do and maybe does not have a very wide suite of products to offer. I understand that. Could you perhaps enlighten us as to why the following appears to be true? When you are on average paying 0.1 per cent interest on standard current accounts and you are able to get a return on that money on the present three-month LIBOR rate of well over four per cent it seems that with your 0.1 per cent on the current account, whereas in the three-month LIBOR rate you can get over four per cent, you are making quite a bit on that, are you not? Is that all eaten up by overheads?
  ( Mr Goodwin) It is not a question of being eaten up by overheads, there are costs associated with providing the service which we provide to the customers.

Dr Palmer

  179. But you are not prepared to say what the costs are because you do not work them out.
  (Mr Goodwin) No, our position is that we do not allocate our costs across the individual components of our business because it involves getting into some fairly arcane practices. How do you allocate the cost of a large branch network, the largest branch network in the country? Do you allocate it all to personal customers or do you allocate it to small business customers? How do you allocate the large cost of the IT platform across customers? It does not seem to us terribly productive to do that.

3   Note by Witness: The important point to stress here is that, firstly, there are some 170,000 individual investors in HSBC who will benefit directly from the shares they hold. Secondly however there are, in addition, some 17 million people who benefit indirectly as members of pension schemes or through Unit linked investments etc. where Trustees of such investments hold HSBC shares for the benefit of members. Back

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