Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 180 - 199)



  180. Is this not almost unique in modern management not to attempt to allocate costs?
  (Mr Goodwin) No, it is not particularly unique.
  (Mr Ellwood) If you take the average benefit, let us take Halifax and Abbey National, of the amount they pay on current accounts, it is less than £1 a month after tax. It is really apples and pears. For less than £1 a month customers at Halifax and Abbey National cannot pay bills over the counter, if they pay in less than £1,000 a month the interest rate drops dramatically, they cannot withdraw less than £300 cash over the counter if they are a Halifax customer, they do not have access to over 2,000 branches, they have 1,100 with HBOS and 700 with Abbey and if they pay in less than £250 per month they will be encouraged to move to another account. If you look at the benefit they get, say £1 per month, then you look at the benefits some of us offer, which are different, things like 30-day purchase protection, things like direct debit benefit cover for accident and sickness, which we reckon are worth £2 per month, it is a slightly different offer, that is all. We do that against the background that when we ask our customers what is important to them, pricing is eighth most important. This is our customers telling us that.
  (Mr Goodwin) Very significant numbers of customers pay us each month to have a current account because of the functionality which is offered. That is the biggest growing constituency within our personal customer base.
  (Mr Barrett) The points being made are that you will find differences in price in a normal contestable market. Given that there have been a few advertisements thrown in here, let me try one. If you take our Open Plan account, which offsets deposit interest and savings interest against a mortgage, the benefits to consumers are in the thousands of pounds a year, not £12. We have 1.2 million people signed up for that and it is growing at the rate of thousands a week. That is an offer we put in which frankly trivialises the interest on current account which is offered by a competitor. This is a market which is alive and well. You will always find differences in prices. In the end the customer will vote with his or her feet and the customer is—I say again—more sophisticated than I believe they are often given credit for in these commentaries.

Mr Mudie

  181. May I try to prick this bubble of complacency? The Which survey said that less than one third of current account holders with you four, if they were starting again, would choose an account with any of you. All the evidence which has been put before us suggests that it is just inertia that keeps your customers with you.
  (Mr Goodwin) We grew our personal customer base.

  182. You are telling us with great pride, excessive pride and excessive profit, that your customers are all happy, but the Which survey says that less than one third would start again with you.
  (Mr Dalton) There is always an opportunity for a survey to make a point. I can say with excess pride, but not with excess profit, that I think maybe there is something to be said for the fact that there is no competitive advantage, or no commercial advantage in inertia. It is to our advantage to encourage switching. Maybe we are all ignoring the fact that if 94 per cent of our customers say they are satisfied or very satisfied we simply do not accept that. The fact is that is the research we have and the fact is that every bit of research we see says they are satisfied. We do not seem able to accept the fact that the customers are satisfied.

  183. Which says they are not.
  (Mr Dalton) One survey; I can give you 50 which say they are.


  184. So you are saying to us that it is a dud survey.
  (Mr Dalton) I do not know; I have not seen the survey. I am telling you that I can give you 50 surveys which say they are. You give me one which says they are not, in fact one particular statistic out of one survey which says they are not. I am sorry, but the surveys say the customers are happy. I am delighted to report that.

Mr Ruffley

  185. A question which I hope will elicit a one-word answer from each of the four of you. On the issue of inertia, about 70 per cent of the current account market is accounted for by your four banks. One of the big issues was the speed with which direct debit information was provided to a switchee bank, a switcher seeking to move. The figure is five working days for information on standing orders and direct debits to be provided by each of your banks. Could you tell me in a one-word answer what proportion of switching enquiries in relation to each of your banks is met within the five-day Banking Code guideline? Give me the number.
  (Mr Dalton) Ninety-five per cent.
  (Mr Goodwin) Ninety-nine per cent; 99.8 per cent for the Royal Bank and 99.7 per cent for NatWest.
  (Mr Ellwood) One hundred per cent within three days.
  (Mr Barrett) I'll see your 100 and raise you!

  186. Do I take that to be 100 per cent, Mr Barrett?
  (Mr Barrett) Yes; it is 90 per cent plus within three days.

  187. Thank you. That is on the record now.
  (Mr Dalton) We shall not let our competitors have higher rates; we shall work to increase our 95 per cent.
  (Mr Goodwin) The number of people we are talking about where there is non-compliance is in single figures. I do not want anyone to leave here today with the impression that there are tidal waves of people leaving. We grew our personal customer base last year.


  188. Mr Barrett, we can take it that your figure was not over 100 per cent.
  (Mr Barrett) No.

Kali Mountford

  189. We have just heard of a baffling array of products. It is impossible for people to choose between them and I do not think people are as sophisticated as you allege, particularly not young people. Is it reasonable for banks to engage with schools to help young people understand the banking system? Would that be an opportunity for selling?
  (Mr Barrett) Yes.
  (Mr Ellwood) Yes.
  (Mr Dalton) For selling?

  190. Yes; selling.
  (Mr Dalton) Let my colleagues speak for themselves but we feel a very big responsibility to help young people learn about financial matters. We do many things in that regard. The principal one is that we are major sponsors of Young Enterprise, which teaches children about business and financial things. We are working with the FSA on education for young people. We operate something like 1,400 school banks across the UK. We are very keen on making sure that young people understand both the responsibilities, obligations and pitfalls of financial activities.
  (Mr Ellwood) We do very similar things but the point is absolutely valid. We need to work harder at education and making sure that people do understand what we are offering.

  191. Including the opportunity to switch.
  (Mr Dalton) Yes.
  (Mr Ellwood) They already have that.

Mr Tyrie

  192. May I turn to the Lloyds TSB memorandum? You say that of the 100,000 basic bank accounts opened so far 69 per cent are loss-making because the balance is less than £1,000. Can you confirm that? Can you tell me whether you hope to make profits from these accounts in some other way?
  (Mr Ellwood) I can confirm that. I can also tell you that the average balance on those accounts is some £250 compared with an average balance for classic accounts of about £1,250. At the moment we do not make a profit from the basic bank accounts. If we get our normal market share of basic bank accounts over the course of the next year or two, we would estimate that we would lose several tens of millions of pounds from operating them. We think it is very difficult to cross-sell sufficiently to basic bank account holders to make a profit. We do accept entirely that we have an obligation here both to support the Universal Bank and to provide banking facilities to basic account customers.

  193. Are other customers' charges higher than they would otherwise have been in order to pay for these guys?
  (Mr Ellwood) No, not at all. Some 80 per cent of our current account customers do not go overdrawn and do not pay any bank charges. The hit to the organisation is to the shareholder rather than to other customers.

  194. But I am reading directly from your submission, paragraph 7.3, which says "... these accounts are in practice being cross-subsidised by other customers".
  (Mr Ellwood) Essentially the ultimate bearer of that subsidy is the shareholder.
  (Mr Barrett) It is a fair point that within a very, very large customer base, there are customers who are loss-making, so to that extent there is inescapably an element of cross-subsidy in that if one's overall profitability is acceptable then you live with that because you also have obligations to the country in terms of financial inclusion, etcetera, which we support. It is a fair comment to say that if you were to micro segment any of the customer bases you would find significant percentages, some that would surprise you, of certain sectors which looked at on a stand-alone basis you would not enter as a business, including by the way the current account. If you looked at current accounts as a business, you would never enter the business because it does not make any money.
  (Mr Ellwood) It depends on the timing to some extent as well. If you are looking at the student account, clearly most student accounts initially do not make any money at all but in later years they invariably do.

  195. Why were you not opening these accounts before? Why have you waited to be pressed into fulfilling the obligations to the country in terms of social inclusion?
  (Mr Ellwood) We agreed to support the Universal Bank with quite considerable sums of money and we have been opening accounts to a greater extent than practically anybody else for the lower socio-economic groups and we have been doing that for many, many years.

  196. It strikes me that what is going on here is a transfer from customers and shareholders to groups of people identified by the Government and the shareholders and customers are being given no effective say in the matter. Is that not akin to a tax?
  (Mr Goodwin) There are two separate issues.
  (Mr Dalton) In the whole business here about banks and profits and charges, it has to be remembered that there are only three sources of any kind of levy or imposition or charge on the banks. It has to come from the shareholders—we have 17 million who are holding shares in their pensions and so on—from the customers or from the staff. There are only those three sources of any levy or charge on the bank. The banks do not have pots of money which do not belong to one of those three groups. Whatever happens, one of those groups is having to pay for something.

  197. Therefore this is a form of tax and it is a form of stealth tax which has been imposed upon you by a mixture of coercion and regulation.
  (Mr Barrett) That is an interesting analogy. If you take the Competition Commission's report which wants a remedy which will transfer money out of the pockets of shareholders, it is a tax on shareholders by any other name. Unless one can point to abusive behaviour, then it is an arbitrary and quite extraordinary intervention into a market economy and it is de facto a decision by the Government to disadvantage the pension fund holders to the benefit of small business who did not want it to begin with.
  (Mr Goodwin) There is a distinction to be made between basic bank accounts and Universal Bank. Earlier I sensed that we were being criticised for not allocating costs. Part of the philosophy in not allocating costs takes us to a point which says that it is in our interests to have as many customers as we can unless we are actively losing money out of the door. So we have a model which is inclusive. We have been opening accounts for people in these groupings over the years. We have now formalised the process and made the process easier for them and have advertised on television that we have these accounts available. Philosophically we are very happy to have them in the belief that financial exclusion benefits no-one and that the more people who are part of the system, the more actual customers for us now and the more potential customers in the future. In that respect it is almost a form of marketing spend and it is an investment for the future. Universal Bank is slightly different because that is not producing anything which is not capable of being delivered through the bank accounts.

  198. Universal banking, as I understand it, is generating a public expenditure saving for the Government, it is a transfer of a financial liability from the Government to banks. In the normal course of affairs I posit to you as a suggestion, would one would expect a Government to say they want you to perform this function and "here is the cheque for it"? In this case are you not being asked to do it and absorb it either through your shareholders or your customers?
  (Mr Ellwood) We are to a very large extent. What we are saying is that we are very happy to play our part in serving the community in this way with support for the Universal Bank, but accepting that it is an absolute direct cost. We are not going to manage these accounts, we are simply going to fund them.

  199. Therefore this is a one-off tax on banks.
  (Mr Ellwood) Yes; to a large extent.[4]

  (Mr Dalton) HSBC operates in 80 countries and many countries like the UK have desired to mechanise the benefits and payments of the Government. In most of the countries I am familiar with, the process has been for the Government to come to the banks and say they want to mechanise the payments process, ask how to do it, what it would cost them to do it and how much they could save by doing it. In the UK we did not do that. We decided to do it through the Universal Bank and the banks have contributed significantly to the setting up of that bank.

  (Mr Barrett) There was an agenda going on beyond the strict implementation of it. This was also tied up with the crisis at the Post Office and by automating payments a major revenue source for the Post Offices was being "disintermediated" by the Government's initiative and therefore the attempt was to put more product into the Post Office at our expense. I think the Government had an objective also of trying to prop up and help the Post Office, unfortunately at our expense. Given that the Treasury were saving £400 million a year by shifting to automated benefit, they could have bellied up to the bar a little more vigorously themselves.

4   Note by Witness: Peter Ellwood was seeking to make the point that it would be possible, if one were so minded, to perceive the Universal Bank as a one-off tax on the banks. However, this is not, nor should it be taken as representative of Lloyds TSB Group's view of the Universal Banking Services scheme. On a number of occasions, and in paragraphs 192 and 277 in particular, Peter Ellwood clearly outlines the Lloyds TSB Group's stance on the Universal bank. Back

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