Memorandum submitted by The Abbey National
1. In the personal current account market,
Abbey National has been an aggressive competitor that has delivered
on its vision "to make customers' lives easier" by providing
highly competitive accounts and delivering them in innovative
ways, through partnerships with other retailers and the use of
e-commerce, including Digital TV. Competition in this market has
been hindered by several barriers to switching, which include:
a perceived loss of credit worthiness
resulting from changing providers;
the bundling of products; and
delays in the switching process.
2. Abbey National is making recommendations
to BACS which could reduce the automated switching process from
the current six weeks to a total of two weeks.
3. In SME banking, Abbey National is a relative
new entrant to the market and is attempting to take business away
from the "big four" by offering small businesses a better
deal. There are a number of issues that need to be addressed:
low interest rates for in-credit
balances and high charges for transactions;
lack of transparency of banking products;
development of portable credit histories;
implementing counter access proposals.
4. Abbey National supports the rapid implementation
of the Competition Commission's recommendations as short-term
steps to improve the competitiveness of the market.
5. Abbey National is the sixth largest bank
in the UK in terms of market capitalisation. Since converting
from a building society in 1989, we have diversified into a wide
range of financial services. We have been in the personal current
account market since 1989 and currently have about 6.8 per cent
market share. More recently, we have been developing our offerings
in banking services for SMEs and now have about 1 per cent of
that market, with the target of achieving a 5 per cent share by
6. Abbey National has welcomed the findings
of the Competition Commission in its recent report, "The
supply of banking services to small and medium-sized businesses",
and the subsequent actions being pursued by the Director General
of Fair Trading. We believe the measures being taken will be useful
steps towards fairer banking, and to giving SME consumers a better
7. We note that the committee's inquiry
will also include issues relating to personal banking, and we
therefore address both personal and SME banking in our comments
here. As an active and vocal supporter of measures to increase
competition in banking services, we hope the Treasury Committee
will find of use our observations in this paper.
8. Abbey National is an aggressive competitor
in the provision of personal current accounts. Our brand vision
"to make customers' lives easier" is carried through
to innovations in the current accounts we offer and in the way
they are made available to customers.
9. Recent innovations in the product offering
include a market-leading rate of interest paid on current account
balances, with the choice given to the customer of opting instead
for an extremely competitive interest rate on overdraft balances.
10. Abbey National's positioning compared
to major competitorsreflecting the two options we provide
customersis summarised in the following chart:
||Gross monthly interest
|Abbey National (preferred in|
|3.0% (3.04% gross AER)
|Abbey National (preferred|
|Bank of Scotland||2.0% (2.02% gross AER)
|Halifax||2.0% (2.02% gross AER)
|Royal Bank of Scotland||0.1%
*Annual Equivalent Rate
11. In 1996, before government began encouraging the
banking industry to help the financially excluded, Abbey National
launched its own basic account, the Instant Plus Account. There
are currently about 570,000 of these accounts in operation. In
2001, we upgraded 49,600 such accounts to full service current
12. Other innovations are helping to make financial services
more accessible. We have led the way in providing access to banking
over Digital TV, with interactive services available through Sky,
NTL and TeleWest. Indeed, we were the first bank in the world
to offer a current account with access through both Digital TV
and the internet. Many of our branches have public Digital TV
and PC terminals, where customers have free use of those facilities
and can receive assistance in using them from branch staff.
13. We have opened 38 branches in Safeway supermarkets
and are in the process of opening outlets in Homebase stores.
We are changing the customer's experience of financial services,
for example through our partnership with Costa Coffee, and we
were the first bank to be awarded a retail innovation award.
14. Our stand-alone internet bank, cahoot, has opened
more than 300,000 accounts since its launch in June 2000 and has
been named "best on-line bank" by three different consumer
15. Given the Committee's past interest in difficulties
of switching personal current accounts as a barrier to competition,
we address related issues in some detail here.
16. About a quarter of the market for new current accounts
consists of people switching from another provider. We believe
that difficulties in customers switching providers remains a significant
barrier to competition. More specifically these difficulties include:
17. Perceived loss of credit worthiness: Customers fear
a loss of credit worthiness by terminating a long-term relationship
with a certain provider. A portable credit history, as proposed
by the DeAnne Julius Review, will ensure that positive credit
data gets transferred to the new provider, ultimately improving
consumer confidence in switching. A portable credit history will
benefit SME customers as well (see paragraph 26).
18. Bundling of products: Some banks require customers
to hold a current account with them in order to have other products,
such as personal loans. Therefore if a customer has a current
account and personal loan with one of these banks, they will be
unable to switch just their current account. This practice has
been judged anti-competitive for business banking customers; its
application in the personal current account market should be examined.
19. Length of time in the switching process: In a submission
to the Treasury Committee last year, Abbey National highlighted
the slow response by two of the "big four" in providing
account information needed for their customers to switch their
bank account to Abbey National. We also cited research showing
that while 77 per cent of customers in the UK have thought about
switching bank account providers, 42 per cent said that the biggest
barrier to actually doing so was the "hassle". While
the "big four" have improved their performance in terms
of providing more prompt account information for those customers
wishing to switch providers, the entire switching process remains
too lengthy and complicated.
20. BACSthe system for processing most payments
into and out of bank accountshas undertaken some significant
steps towards completely automating the switching process, but
relatively few people are aware of this progress, and only about
10 per cent of Abbey National's new bank accounts are opened using
the automated switcher process. (One of the reasons for this could
be that many of our new bank account customers do not already
have an account, but most are probably doing all the work of switching
21. Currently, the automated switching process takes
about six weeks in total to complete, and no guarantee can be
given to the customers about how long the process will take. Abbey
National is making recommendations to BACS that could reduce the
process to about tqo weeks and would provide customers with greater
certainty about the total length of time for the process to be
completed. We believe this will reduce a significant barrier to
switching and will make the market more competitive.
22. A summary of the automated switching process and
Abbey National's recommendations follows.
23. As the Competition Commission's report concluded,
there are a number of significant barriers to competition in the
market of banking services for SMEs. We welcomed the Competition
Commission's conclusions and wish to highlight the following issues:
24. Low interest rates for in-credit balances: The Competition
Commission report called for the "big four" to pay interest
(or provide free money transmission services). Currently, the
big four pay 0.1 per cent or no interest on current accounts for
small businesses. The Competition Commission's recommended level
of interest, at base rate minus 2.5 per cent, is below the rate
currently offered by Abbey National (3 per cent), but nonetheless
will benefit small businesses by raising awareness of interest
payment as an element of the SME banking package. When the Competition
Commission report was published, Abbey National was already paying
interest of 3 per cent on in-credit balances in addition to free
banking forever up to certain limits in the volume of transactions.
These features continue to be part of our offer.
25. Lack of transparency: Small businesses in particular
often have little time to compare or discuss relative offers,
and thus have been vulnerable to the lack of transparency of banking
charges. Close attention is needed to both the form in which price
information is compiled and the manner in which this is presented
to, or can be accessed by, SMEs. Given that severe pressures of
time and other priorities for smaller businesses make it difficult
for them to shop around, there must be absolute clarity and simplicity.
26. Portable Credit History: Individual SME credit informationor
rather the lack thereofis a major inhibitor for new entrants,
and many businesses will find it hard to obtain the best deal
for their banking if competing banks do not have access to their
credit history. Therefore the Competition Commission's recommendation
that a portable credit history be created that can be made available
to an alternative provider is welcomed. However, care should be
taken to ensure that there is no significant delay in implementing
the recommendations, which could happen if an excessively highly
developed model of a portable credit history is pursued. A simple,
first phase solution could be achieved with minimal change to
the simple individual account activity profiles which each of
the "big four" maintain now. This first phase solution
could be achieved within a very short termwe would hope
that the system would be fully operational by mid-2003.
27. Counter Access: We have argued in the past that restricted
branch counter access can be an inhibiting factor for new entrants,
and we welcome the proposed counter access scheme that would give
SME customers access to counter transactions at any "big
four" branch. However, we believe that the review can be
conducted more quickly than the 12 month timeline suggested in
the report. We accept that there are technical issues to be resolved.
However, given the very limited amount of SME banking counter
activity which takes place outside the "big four", there
is clearly little scope for disruption or for a major influx of
additional transactions across the "big four" banks'
counters. Accordingly we trust that by the end of the 12 month
period, there will be a clear outline which can be considered
by the other competitors. We would ask that the newer entrants
be allowed to input into the scheme's development process to ensure
it is appropriate for all competitors.
28. In all of these elements we are concerned at the
reference to "two to three years" for implementation
in some areas, and hope that the monitoring process will serve
to ensure that earlier progress is achieved wherever possible.
Moreover we would ask that the Director General of Fair Trading
actively monitor, on an ongoing basis, the improvement measures
to ensure that the full spirit of the Commission's recommendations
regarding switching levels, charging and transparency are both
achieved and sustained into the future.
29. We recognise that the remedies proposed by the Competition
Commission should only be considered to be short-term ways of
redressing the bad treatment many SMEs have suffered. Longer term,
consumers are best served by a fully competitive market, where
barriers to entry are low and accounts are more easily switched.
We are achieving strong growth in our SME account base, and this
will increase further as we continue to build our proposition
and our presence strongly. Wider customer choice, and easier access
to that choice, represents the most constructive defence against
a monopoly environment, and we expect to play our part in providing