Examination of Witnesses (Questions 320-339)
MR BENNY
HIGGINS AND
MR JAMES
CROSBY
1 FEBRUARY 2005
Q320 Chairman: The ordinary person in
the street would think if you sold people something you would
get the money back and your submission says to us that you got
that money and you invested it, but in fact you lent it. How does
it square up?
Mr Crosby: First of all, the proceeds
are free and unencumbered and are generally used for investing
in the future of that business. As it happens, the major thing
we did in that business last year was the largest recruitment
exercise in retail financial services in 2004, it was 2,000 people
which we felt we needed to strengthen our customer service.
Secondly, we have lent an increased facility to the company, not
uniquely related to this transaction, against all its operations
and ultimately on terms that have been agreed on an arm's length
basis, so that money will be repaid to us, that is a commercial
loan.
Q321 Chairman: It would be useful if
you could write to us on that to explain it.
Mr Crosby: I am very happy to
do so.[1]
Q322 Chairman: At the time of the Cruickshank
report in 2000 a branch based withdrawal at the counter cost over
three times as much as an ATM withdrawal. Are these figures still
accurate for both your banks?
Mr Higgins: We do not allocate
costs in that manner. Clearly that order of magnitude would be
about right.
Mr Crosby: It is about right.
Q323 Chairman: Mr Higgins, how separate
is the management of governing policy for RBS's own free ATM network
from that of the Hanco network?
Mr Higgins: It is quite independent,
but it does report to me as it falls within my area of responsibility.
I should stress that our reason for buying Hanco was that it was
an emerging channel, as this inquiry has set out very clearly,
and as such it was important for us to be represented. More importantly,
in terms of increasing customer choice, it is the retailers who
are typically our small business customers and who are providing
that service, so it was very important to us.
Q324 Chairman: In terms of the governing
policy, it is integrated with RBS, is it?
Mr Higgins: Yes. We are growing
our free estate and we intend to continue to do so. The only places
where we have taken machines out have been where we have failed
to reach an agreement, which are the 14 machines referred to earlier.
Hanco is growing a quite different estate. A typical ATM which
is free to use has 7,000 withdrawals a month and it can go up as
high as 30,000. The typical number of withdrawals in a Hanco machine
is less than 300. These are quite separate markets.
Q325 Chairman: In terms of the strategy
of RBS, there will be empathy between Hanco and the RBS approach
for ATMs, will there not?
Mr Higgins: The same values in
terms of running a business, but they are quite separate in terms
of the strategy.
Q326 Chairman: Could you give us a note
on that?
Mr Higgins: Absolutely.[2]
Q327 Mr Cousins: Do you have any special
arrangements, either Halifax with Cardpoint or RBS with Hanco,
about the revenue derived from charging?
Mr Crosby: No, I do not think
so, not in terms of my understanding of your question.
Q328 Mr Cousins: I thought my question
was perfectly clear.
Mr Crosby: We have sold the machines
and we do not get any revenue from them.
Q329 Mr Cousins: And you have no special
arrangements with Cardpoint about sharing a revenue?
Mr Crosby: No.
Q330 Mr Cousins: So it is a straightforward
case, you have lent them the money, and they pay the money back?
Mr Crosby: Yes.
Q331 Mr Cousins: What about your relations
with Hanco, do you have any special internal arrangements about
the charging income?
Mr Higgins: It is very clear in
our case, Hanco is wholly owned by The Royal Bank. The pricing
that is set for a particular machine in a particular location
is set by the retailer independent of the amount that Hanco receives.
Hanco receives roughly a third of the typical fee of £1.50,
but in a case where the charge was higher what Hanco would receive
would still be the same, and Hanco is wholly owned by The Royal
Bank, so that is the income less the costs in delivering that
service.
Q332 Mr Cousins: The arrangements that
exist between people providing customers with cards and the cash
machine operators are fairly clearly set down. For remote machines
there might be a financial incentive to having a charged for system
because you would save the fees that you would otherwise have
to pay the cash machine operator for a free machine.
Mr Higgins: That is true. However,
let us put our credentials on the table. The Royal Bank of Scotland
has never charged customers or non-customers for the use of ATMs.
When we acquired NatWest in March 2000 we very quickly abolished
a decision to charge customers. We have never done so and we have
no plans to do so notwithstanding that the economic dynamics of
ATMs would be more favourable if there were charges.
Q333 Mr Cousins: You would agree that
there is a general financial cost saving for you in the expansion
of the charged for network.
Mr Higgins: It has no impact on
the situation as far as we are concerned. We have a situation
at the moment where running our 6,000 free to use ATMs comes at
some considerable cost. The machines which Hanco are putting in
place are quite separate and in quite different locations, locations
that would not be served under any reasonable circumstances by
a machine that was free. The cost of these machines is of quite
a different order.
Q334 Mr Cousins: The point I am making
to you is that if one of your customers uses a charged for machine
you do not pay a fee to the cash machine operator.
Mr Higgins: That is right. It
is equally true that if a customer of another bank was to use
one of them instead of using one of ours we would forego the interchange
that we would have received. Interchanges flow in both directions
if you are an issuer and an acquirer. [3]
Q335 Mr Cousins: What is your attitude
to this?
Mr Crosby: I think I see the point
you are making. The fact of the matter is, however, that the fee
free ATMs in the UK have also grown. Over the last four or five
years they have grown from 27,000 to 33,000 and with a much higher
volume, so there is continued growth in that area and the predominant
transactions continue to be there. I do not think one can argue
against that background that the addition of fee charging is necessarily
a saving for the banks, it is an addition of choice if you view
it from the perspective of saying there is no interchange fee.
Q336 Mr Cousins: And the fee system is
different in the case of machines that are owned by the banks
from machines that are free standing in remote locations. The
fee you save as the charged for network grows is at its greatest
for remotely placed machines. That is correct, is it not? So you
have a financial incentive to see the growth of machines in remote
locations that are charged for.
Mr Crosby: I think it is a marginal
difference and it is small in relation to the fees that are being
charged to make these remote locations sustainable in the eyes
of either the retailer or the provider who owns them.
Q337 Mr Cousins: When the competition
authorities were looking at these arrangements that were being
made between banks and cash machine operators they allowed a higher
fee to be paid for freestanding machines because of the extra
costs involved and there was a clear steer that that was intended
to encourage cash machine operators to reduce those costs gradually,
but in fact what you both have chosen to do in slightly different
ways is to see the expansion of the charged for network saving
you the fees. Is that not quite what the competition authorities
intended when they allowed this system to be created?
Mr Higgins: Can I just state some
facts about what has happened? In 2004, throughout our 6,000 free
to use ATMs, both branch and non branch, we had 576 million transactions
compared with 538 million transactions in 2003. There was also
an increase in the number of ATMs we had available. So the free
to use ATM estate of The Royal Bank of Scotland Group is growing
both in terms of number and in usage.
Q338 Mr Cousins: What about the growth
of the Bank of Scotland's free machine network off bank sites,
is that growing?
Mr Higgins: The Royal Bank of
Scotland's network?
Q339 Mr Cousins: Yes.
Mr Higgins: Both our branch and
non branch networks are growing at a fairly healthy rate.
1 Ev 175 Back
2
Ev 173 Back
3
Note from the Witness: Even where there is a surcharge
the card issuer still has to pay interchange to the ATM owner
for balance enquiries and rejected transactions. This is substantial
(the current rate in LiNK for balance enquiries is 18.2p or nearly
two-thirds the rate fir cash withdrawals). There is no real incentive
for banks to encourage conversion of sites to charging. Back
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