Select Committee on Treasury Minutes of Evidence

Memorandum submitted by the Halifax Bank of Scotland Limited (HBOS) plc


  1.1  The Halifax contributed to the debate about the provision of banking services when it appeared before the last Treasury Select Committee Inquiry into banking and the consumer. Since then, the Halifax and Bank of Scotland have merged to form HBOS, a leading UK financial services group committed to providing customers with simple, value for money banking products.

  1.2  HBOS believes that the level and pace of competition across the UK financial services sector is patchy. In mortgages and savings, for instance, competitive pressures are very high. Elsewhere, there is undoubtedly less competition although this is changing, especially in personal current accounts, and business banking. The mission of HBOS, principally through the Halifax and Bank of Scotland brands, is to be the main agent for change in these product areas.

  1.3  In this submission, we cover the business strategy of HBOS, especially in personal banking and business banking, the two major areas of inquiry for the Treasury Select Committee.


  2.1  HBOS is committed to growing its business by.

    —  Consolidating its number one position in mortgages and savings.

    —  Increasing its market share in the personal banking market.

    —  Growing its market share in business banking across the UK and especially in England and Wales.

  In building market share, the Group is also committed to delivering tangible benefits for both shareholders and customers alike. Value for money products can deliver realistic and sustainable returns for shareholders—that is our strategy.

  2.2  We measure our success—and believe this should be the model elsewhere in the banking sector—by focusing on three straightforward variables:

Value for money products

  Our personal current account, branded both Halifax and Bank of Scotland, is deliberately priced to be amongst the most competitive in the market place. Similarly, Bank of Scotland has recently launched the first current account mortgage specifically aimed at the SME sector. Our research shows that combining a mortgage with a business current account could save a typical SME customer up to £10,000 a year[1].

Clarity and Transparency

  HBOS, principally through the Halifax brand, is the leading provider of Cash ISAs in the UK. Our latest published figures show that the Group is achieving 25 per cent market share in the Cash ISA segment, double the Halifax's natural liquid savings market share. Simple, transparent, products clearly strike a chord with investors.

Easy product portability

  The Halifax was one of the first major banks to introduce an automated switching system for retail customers switching their current accounts. Bank of Scotland is the first bank to introduce a dedicated switching system for business current account customers wishing to move their accounts. Both initiatives are working well. Over 100,000 customers have already taken advantage of the Halifax switching system, for example.


  3.1  In its fifth report, "Banking and the Consumer", the Treasury Select Committee emphasised the importance of the easy transfer of current accounts between banks by retail customers. The Committee stressed that portability was therefore essential to increasing competition in personal banking services—a view which HBOS very much shares.

  3.2  The current account market is changing for the better, principally because of the products being offered by the newer entrants such as HBOS. For example, over the last 18 months, principally through the Halifax brand, HBOS has attracted one million new current account customers—a market share of 22 per cent last year. Our research clearly shows that more UK consumers are conscious of the value—or lack of it—inherent in current accounts, the most widely held financial services product. Over 15 million existing current account customers would considering switching their account to get a better rate of credit interest according to research from NOP, commissioned by the Halifax. For customers, a fair rate of interest paid on current accounts is the most significant product related driver.[2]

  3.3  In its Banking Report, the Treasury Select Committee also highlighted the importance of social banking—HBOS shares this view. Through active marketing, the Bank of Scotland and Halifax now have over 2.4 million basic banking accounts. The Group is, therefore, by far the largest social banking provider in the UK with a total market share of at least 80 per cent. The Bank continues to reinforce its commitment to this sector too. For instance, in conjunction with HM Treasury, the Halifax is piloting the Savings Gateway product, the only bank to do so.

  3.4  The Group also continues to introduce a number of portability measures designed to make it easier for customers to switch bank accounts. For instance, the Halifax will significantly extend the functionality of its existing dedicated switching system later this month. For the first time, customers transferring to the Halifax, will be able to go to their local branch at any time to enquire at what stage the transfer process is at. It may well be that this measure is adopted by other banks in due course.

  3.5  Enhancing portability, however, is fundamentally an industry wide issue. The Treasury Select Committee was, therefore, right to identify switching as one of the most important issues facing the banking industry. Last November, in a widely reported move, an industry wide automated switching system was finally introduced across the UK. Clearly, the new system is to be welcomed, especially now that the "Big Four" banks are active participants in it. It is perhaps too early to make a final judgement on its effectiveness but at this stage a number of points can be made:

    —  The new system does seem to have encouraged a much higher degree of co-operation between individual banks, a welcome development.

    —  It is still unclear whether the direct debit players, a key element of the new service but outside the banking system, are playing their part.

    —  The Group continues to believe, in line with its previous submission to the Treasury Select Committee, that if the new system does not deliver the benefits it is meant to, the Government should consider regulation of some kind.

  Regulation, however, is in HBOS's view, a measure of last resort. At this stage, HBOS would suggest that the Treasury Select Committee, along with HM Treasury, keeps a watching brief on the new system's progress.


  4.1  HBOS is committed to growing its share of the UK business banking market, across the UK under the Bank of Scotland business banking brand. The Group is employing a two-pronged strategy here too. In Scotland, our objective is to consolidate our position as one of the country's leading business banking providers. In England and Wales, using the Halifax's retail branch network, we are introducing market leading financial products and services designed to give customers a real choice on the High Street for the first time. Overall, our objective is to increase our share of the UK business banking market from 3 per cent to 6 per cent over the next three years.

  4.2  Small business customers are eager to obtain better value for money products. Our research shows that six out of 10 small businesses believe their bank is making a lot of money by not paying interest on their current account while nine out of 10 businesses think they have a right to earn interest[3]. Contrary to the popular perception, many small businesses also run substantial balances in their business current accounts. Bank of Scotland, for example, has made public the average balance (£10,000) in its business current accounts. It would be interesting to know the average balances held by small business customers of the Big Four.

  4.3  Bank of Scotland is responding to small businesses demand for better value by launching a whole range of banking products. In doing so, it is targeting in particular the customers of the Big Four who are the dominant players in this market. In addition to our market leading interest bearing business current account available across the UK, Bank of Scotland has also launched a "Free Business Banking Forever" product initiative as well as a range of very competitively priced business deposit accounts, an area where the Big Four have traditionally not been that competitive. Other product initiatives will follow.

  4.4  HBOS does not, however, concur with the Competition Commission's recent decision to introduce price control into the SME banking market. Our view is straightforward. On principle, irrespective of the product area, we are opposed to price control. As a policy measure it tends to stifle innovation and protect the incumbent's market position.

  4.5  The Competition Commission seems to have taken the view, accepted by the Government, that the market share aspirations of newer entrants, such as HBOS, are not enough to provide a genuine change in the intensity of competitive pressure in the SME banking sector. Perhaps not unsurprisingly, we take a different position. In our view, the salient consideration is not the absolute change in market share position per se. The real issue is the impact that even a relatively small movement in market share can have on the perceptions of major investors about the sustainability of the incumbents business models. Even a relatively small decline in absolute market share for the Big Four in SME banking, largely driven by the newer entrants such as HBOS, could lead to a readjustment of their stock market valuations if their investors became concerned about the sustainability of their proposition. Therein lies the real competitive pressure on the Big Four, including the likelihood that they would respond with better pricing for their customers.

  4.6  The Group does clearly, however, welcome the other main recommendations in the Competition Commission's recent report. Bank of Scotland will, therefore, work closely with the DG OFT to play its part in ensuring that transparency and easy product switching becomes the norm for all SMEs across the UK. In many respects, the Group is also ahead of its competitors in this area. For example, prior to the publication of the Commission's report, Bank of Scotland unilaterally introduced its own credit history reference. All Bank of Scotland branches therefore have a straightforward credit history reference which customers can use if they wish to move to another bank.


  5.1  The personal banking market, particularly the current account segment, is changing, principally because of various product initiatives by newer entrants, including HBOS. Better value products are at the heart of this change. So too is an increased emphasis on easy current account switching although a final judgement has yet to be made about the efficacy of the new automated switching system. HBOS suggests that the Treasury Select Committee keeps a watching brief here highlighting, in particular, the role of the direct debit players.

  5.2  HBOS is also playing its part in the business banking market, the other major area of inquiry for the TSC, principally through the Bank of Scotland brand. Our objective is straightforward—to double our market share over the next three years mainly by being the only substantive High Street alternative to the Big Four. We aim to do so by again providing transparent value for money products that meet the diverse financial needs of the average SME.

  5.3  The recent Competition Commission's report into business banking has injected a new dynamic into the sector. Unfortunately, in HBOS's view, the decision to introduce price control could actually reduce innovation and competition at the same time. HBOS also believes that the Commission should have focused on the impact of even small changes in absolute market share on City perceptions about the sustainability of the Big Four's business models.

  5.4  Finally, HBOS welcomes the other main recommendations in the Competition Commission's Report and in many cases is already implementing them. Bank of Scotland will work closely with DG OFT to play its part in ensuring that easy portability and transparent products are at the heart of UK business banking.

May 2002

1   "Bank of Scotland launches first ever offset mortgage for small; businesses"-Press Release 25 March 2002. Back

2   "Current account inertia is dead"-Press release 31 July 2001. Back

3   "A Fair Deal"-Press Release 5 December 2001. Back

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