Select Committee on Treasury Minutes of Evidence

Memorandum submitted by The Abbey National Group


  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; and

    —  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 2005.

  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 deal.

  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 competitors—reflecting the two options we provide customers—is summarised in the following chart:

Current Account
Gross monthly interest
Authorised overdraft
rate APR
Abbey National (preferred in
credit rate)
3.0% (3.04% gross AER)
Abbey National (preferred
overdraft rate)
Bank of Scotland
2.0% (2.02% gross AER)
2.0% (2.02% gross AER)
Lloyds TSB
Royal Bank of Scotland

  *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 accounts.

  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 publications.


  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.  BACS—the system for processing most payments into and out of bank accounts—has 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 themselves.)

  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 information—or rather the lack thereof—is 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 term—we 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 that choice.

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