Memorandum submitted by the Campaign for
Community Banking Services
EXECUTIVE SUMMARY
The presence of a local bank branch is especially
important in bringing the socially excluded into financial citizenship
and, having achieved ownership of a bank account, ensuring that
it is used to the full in developing essential money management
skills. The less financially educated in society often find it
easier to deal face to face in such matters than to use the alternatives
of written communication, telephone, machine or internet which
are often not available to them or not suitable. A large branch
in a city centre or in another community, where the individual
is not known or is not comfortable, is not an acceptable alternative.
The non-presence of a branch in communities
of concentrated deprivation, coupled with the practice of banks
to centralise business development, makes it easy for the large
retail banks which dominate the UK market to ignore what potential
does exist and concentrate resources in the more affluent parts
of an area. Bank closures often have a domino effect on local
shops and services whose loss contributes to the social exclusion
of a whole community.
Against that background and over 5000 branch
closures since 1989 (nearly 40% of the network), new independent
academic analysis has revealed:
1989-1995—"rates of closure were
higher in areas of high population characterised by poverty and
deprivation"
1995-2003—"a strong correlation between
branch closures and areas that were socially and economically
disadvantaged and characterised by above average concentrations
of ethnic minority groups."
This alarming trend is confirmed by analysis
of the 2005 closures by HSBC, the first major bank to recommence
branch closure programmes after the industry pause which is now
coming to its end. Communities losing bank branches are often
also deprived of free to access ATMs in favour of the commercial
fee charging versions.
OUR PROPOSAL
There is a very flexible alternative to branch
closure, applicable to areas of high deprivation (inner cities
and estates) as well as to suburban areas and smaller rural communities
serving the differing needs of the elderly, immobile, disabled
and small businesses. Therefore this "shared branching"
or "white label branch" model, which provides a common
counter service to customers of all banks, would uniquely benefit
from economies of scale in development and operation. It has been
academically validated in the UK as "operationally feasible
and financially viable" and is proven in operation in the
United States.
Although this model would be an excellent means
of providing access to banking services in deprived bankless communities,
including provision for money advice, credit union and/or CDFI
presence and promotion of basic bank accounts, the banking industry
has consistently rejected the proposal, most recently in May 2005,
without substantive reason. The very limited rural "shared
banking" pilot scheme conducted by four banks in 2002 was
not a trial of the model proposed and validated; the banks"
pilot has been thoroughly discredited as a relevant test of national
demand for shared branching.
The Treasury Committee expressed in its report
of 30 July 2002 an intention to revisit the issue of shared banking
on completion of the pilot study; the current inquiry provides
an excellent and appropriate opportunity to do so, especially
as government has shown no appetite to intervene on behalf of
the vulnerable.
NOT ENOUGH
Consequent upon its decision to compete directly
with the retail banking sector in the sale of financial services
products, Post Office Ltd no longer provides a potential universal
channel for local banking access beyond the basic bank account.
The credit union movement has a very valuable financial inclusion
role (helped by the proposed new Service Account) but its size
and late development in the UK effectively prevents it becoming
a panacea: however the introduction of "shared branching"
to deprived bankless communities would provide the movement with
partnership opportunities for growth and new sources of income.
1. INTRODUCTION
1.1 The Campaign for Community Banking Services
(CCBS), formed in 1997, is a coalition of 28 national representative
organisations which share a concern over the diminishing availability
of local access to banking services, particularly for small businesses,
the elderly, disabled and those on low incomes. Details of supporting
organisations are on the CCBS website www.communitybanking.org.uk
1.2 The principal concern of CCBS has from
the outset been the impact of branch closures
on access to banking services including:
The social cost of excluding low-income consumers
from mainstream financial services: exacerbated by absence of
a community based banking presence.
1.3 CCBS has repeatedly proposed to the
retail banking industry a flexible model of shared branching,
providing a low cost neutral counter service to customers of all
banks. This model would be an excellent means of providing access
to banking services in deprived bankless communities, including
provision for money advice, credit union and/or CDFI presence
and promotion of basic bank accounts thus making a meaningful
contribution to improving access to affordable credit and access
to generic financial advice.
1.4 Despite the same model also being capable
of meeting cost-effectively the transactional needs of suburban
and rural areas from which the banks withdraw, the industry has
consistently rejected the proposal, most recently in May 2005,
without substantive reason.
2. IMPORTANCE
OF LOCAL
BANKING PRESENCE
2.1 The presence of a local bank branch
is especially important in bringing the socially excluded into
financial citizenship and, having achieved ownership of a bank
account, ensuring that it is used to the full in developing essential
money management skills.
2.2 The less financially educated in society
often find it easier to deal face to face than to use the alternatives
of written communication, telephone, machine or internet which
are often not available to them or not suitable. This has been
recognized not only by CCBS but in successive reports by, for
example, the OFT (January 1999) to SAFE (November 2005) and the
practice of banks, most recently Halifax in September 2005 which
is attempting to exclude basic bank account holders from use of
the counter as they take up a disproportionate amount of capacity.
2.3 The non-presence of a branch in communities
of concentrated deprivation, coupled with the practice of banks
to centralize business development by area, makes it easy for
the large retail banks which dominate the UK market to ignore
what potential does exist and direct resources to the more affluent
parts of each area.
2.4 Bank closures often have a domino effect
on local shops and services, as bank users go elsewhere to spend,
and the loss of these facilities contributes to the social exclusion
of the whole community.
3. BRANCH CLOSURES
3.1 Since 1989 the big high street banks,
which have traditionally and uniquely served areas beyond town
and city centres, have closed over 5000 branches, 38% of the network.
3.2 Analysis of branch closures 1989-1995
(Leyshon and Thrift : University of Bristol 1998) revealed that:
"rates of closure were higher in areas of
high population characterized by poverty and deprivation."
3.3 Analysis of branch closures 1995-2003
(Leyshon and French: University of Nottingham to be published
by the ESRC in 2006) reveals:
"a strong correlation between branch closures
and areas that were socially and economically disadvantaged, and
characterized by above average concentrations of ethnic minority
groups (Indian, Pakistani and Bangladeshi)."
"The higher rate of closure—over 30%—was
experienced in Multicultural Metropolitan areas, which includes
poor inner city areas."
It should be noted that this type of area enjoyed
less branch density historically than more affluent areas, so
the impact of loss is greater still.
3.4 Since 2000 there has existed an informal
moratorium on mass closures following the public and media outrage
at Barclays closing 171 branches on 7 April 2000. However, there
are strong indicators that the pause is ending with HSBC closing
52 branches in 2005 including many in inner city communities of
high deprivation and 100 announced closures by Yorkshire and Clydesdale
Banks (NAB Group) including ones in deprived areas of Glasgow,
Bradford, Leeds and Sheffield.
3.5 Research conducted for CCBS in November
2003 revealed:
581 urban communities with only 1 bank remaining
308 urban communities with only 2 banks remaining
These communities are especially vulnerable
to a complete loss of local banking access.
3.6 UK legislation and financial services
authorization and regulatory procedures impose no obligations
on banks with regard to meeting credit needs and delivering banking
services to low-income neighbourhoods. The situation in the United
States, because of the Community Re-investment Acts, is quite
different.
4. ATMS
4.1 The Committee is familiar, from its
2005 Inquiry, with the huge growth in fee charging ATMs and recommended
that government maintain a watch on any significant decline in
numbers of free to access machines operated by the banks.
4.2 CCBS is concerned only with communities
which lose bank branches. The argument is that it is the banks
which have broken the "contract" and taken away customer
rights to free withdrawal of salary, wage, pension or benefit
credits which continue to flow into the account. Of the 800 communities
which have lost all banks, a sampling by Which for the Committee
31 March 2005 suggests 500 do not have access to a free ATM.
4.3 Following the government response to
the Committee's report, CCBS put a proposal to the banks, via
the BBA, that a mechanism should be established to ensure that
at least one free ATM is maintained in each community from which
bank branches are withdrawn. The proposal suggested a capped annual
allocation of funds and some consumer body involvement in its
allocation. An ATM is not a substitute for a branch in deprived
areas but it is clearly unfair that branches should be closed
and ATM provision left entirely to the independent sector which
necessarily has to charge; this impacts most heavily on low income
consumers.
4.4 The BBA's Retail Banking Committee has
twice considered the above proposal, most recently in November
2005. Regrettably, BBA member banks "want to look individually
at every circumstance where a branch closes" and did not
agree to the CCBS proposal, which is currently being appealed.
4.5 CCBS is concerned that this ad-hoc
situation does not adequately protect deprived communities
and cites two illustrative cases from 2005 closures by HSBC:
Ogmore Vale
(deprived post mining community in Welsh Valleys)
Barclays closed branch April 2000
HSBC closed last remaining bank July 2005
HSBC free ATM removed; only fee charging ones
remain
Kensington, Liverpool 7
(in the most deprived 1% of urban communities)
HSBC closed last remaining bank August 2005
Only fee charging ATMs remain in the area
5. THE CCBS SOLUTION
(THE "WHITE
LABEL"/COMMUNITY
BANK)
5.1 With the growth in number and popularity
of alternative ways to bank (ATM, cashback, post, fixed and mobile
telephone, internet) it is recognized that banks are finding it
increasingly difficult to sustain individually branded outlets
in smaller communities and those with low income populations.
This trend will continue and will affect larger communities leaving
isolated those unable or unwilling to use the alternatives.
5.2 As an alternative to closures, CCBS
has proposed a neutrally branded, outsourced or franchised, model
which would provide the basic counter and free ATM services to
100% of the local personal and small business population that
need such facilities with costs shared between several participating
banks. The model, described as "The White Label Branch"
or "Community Bank":
— has been validated by Loughborough
University Banking Centre March 2000 as "operationally feasible
and financially viable."
— is operated successfully, with high
volumes, in many US States by credit unions (similar to retail
banks in UK). See 7.3
— could use "shared branch"
technology (Mutual Plus) developed by LINK for building societies.
5.3 The model is very flexible; it can be:
— franchised to retailers, credit unions,
CDFIs and similar
— outsourced as a stand-alone similar
to a bank sub branch
— part of a multi-service outlet including
money/debt advice, postal services, credit union/CDFI presence
etc.
5.4 Despite it being the preferred option
of bank customers living/operating businesses some distance away
from bank branches (Kempson & Jones for BBA January 2000),
the "shared branching" model has not been trialled in
the UK due to continued opposition by the major retail banks,
most recently in May 2005. (See www.communitybanking.org.uk/pressreleases
)
5.5 In his validation report, March 2000,
Professor Howcroft of Loughborough University Banking Centre,
noted that the principle of co-operation (between the major banks)
was fundamental to the model's success. To this CCBS would add
that only the big banks (75% of the personal market and 90% of
small businesses) have the knowledge, expertise, customer base
and access to clearing and IT systems to undertake cost justified
trials; often the premises of a closing branch would be the most
suitable.
6. TREASURY COMMITTEE
30 JULY 2002
6.1 Throughout 2002 the BBA, on behalf of
Barclays, HSBC, Lloyds TSB and NatWest carried out a small pilot
scheme, which they erroneously described as "shared banking",
comprising 10 small relatively remote rural communities having
only one bank branch. This was the delayed response to the public
and media outrage at branch closures culminating in the Barclays
cull of 171 on 7 April 2000.
6.2 The pilot scheme plan was publicly criticised
by CCBS and other consumer organisations prior to commencement;
a full review of why it proved little or nothing about the national
demand for, and operation of, shared branching can be found at
www.communitybanking.org.uk/reports That urban areas were excluded
from the pilot is particularly relevant to the Committee's current
inquiry.
6.3 The Treasury Committee Fifth Report
of Session 2001-02 published on 30 July 2002 stated, paragraph
15: Branch Closures and Branch Sharing " is disappointed
by the lack of enthusiasm shown by the largest clearing banks,
and the limited scope of the BBA pilot study. The Committee recommends
that, following the pilot study, the BBA publishes a report on
the scope for a more comprehensive range of services to be handled
in shared branches. In light of this, the Committee may look further
at this matter to review progress. In particular we should welcome
examples of bank sharing in areas which have lost all banking
facilities."
6.4 The independent evaluation of the pilot
scheme by Professor Elaine Kempson of Bristol University's Personal
Finance Research Centre, April 2003 was heavily qualified in respect
of the site selection and service offered. She made the following
observation relevant to this inquiry: "It is not possible,
on the basis of this evaluation, either to suggest a realistic
catchment area for the selection of sites in suburban or inner
city areas……………….a further pilot
would therefore be required"
6.5 To date the Committee has not had an
opportunity to review the shared branching concept.
7. CREDIT UNIONS
7.1 Credit Unions are small co-operative
savings and loan institutions run for members, generally by volunteers,
with a commitment to serve (inter alia) people in financial
difficulty, on low incomes and excluded from mainstream financial
services. Some credit unions are run primarily for employees,
public sector and private.
7.2 Established in the UK approximately
30 years ago, the movement has failed to achieve critical mass
due to restrictive legislation and regulation (now being relaxed)
and a financial services marketplace which is dominated by big
players with huge marketing budgets. Nevertheless credit unions
fulfill a valuable need for the financially excluded and the work
of the movement is to be applauded.
7.3 In Ireland and, more particularly in
North America, the movement is much older and reached critical
mass before the financial services industry became so sophisticated.
In North America credit union branches are virtually indistinguishable
from retail banks, employing staff and offering a full range of
cards, ATMs, checking accounts as well as savings and loans. Credit
Unions in America established the first shared branches 30 years
ago and there are now over 1,400 outlets with a brand-neutral
stand-alone version, similar to that proposed by CCBS for UK banks,
handling 80% of shared branch activity according to a report by
independent banking consultant David Cavell. Examples given to
CCBS of suburban stand-alone shared branches in Tulsa, Oklahoma
have transaction volumes in the range of 1,500-2,000 per day.
7.4 Long awaited relaxations in the regulatory
rules governing credit union lending in the UK are now in place
and 2006 will see 4 credit unions piloting a current account for
which Co-op Bank is providing the systems infrastructure. It is
hoped that 50-100 (out of 550) institutions will eventually offer
the service but transactions will have to be carried out at ATMs
or post offices.
7.5 The introduction of a current account
facility is welcomed but it is not a panacea. Because of the anti
money laundering obligations imposed on the volunteers who carry
out account opening many credit unions will not want to offer
the service. Others will be deterred by the size of post office
counter charges and ATM inter-change fees in relation to balances
maintained to say nothing of administration costs particularly
if, for example, direct debits have to be returned unpaid.
7.6 The availability of a current account
facility does not conflict with CCBS's proposals that a "shared
branching" franchise by the big retail banks could be offered
to credit unions with high street "bank type" premises
in deprived bankless areas, generating usage income for the credit
union from non-members and businesses. Alternatively a credit
union could have a presence in a "shared branching"
stand-alone.
7.7 The small size and late development
of the credit union movement in the UK effectively prevents it
from being the panacea to financial exclusion on its own but working
with a coalition of banks through shared branching could achieve
significant results without conflict.
Note: Although Community Development Finance
Institutions are not covered specifically in this evidence, the
suggestions in 7.6 could apply equally to such bodies which lend
to start-up and small businesses outside mainstream banking criteria
and to low-income individuals.
8. BASIC BANK
ACCOUNTS
8.1 Introduced in April 2003 by all major
banking groups (and Nationwide Building Society) in response to
government dictat although the industry generally sees the market
as unprofitable and low in sales opportunity for investment, savings
and loan products.
8.2 Although, at September 2005 nearly 6
million basic bank accounts were reported by the BBA, many of
these do not relate to the intended market. Better, although not
perfect, indicators are:
| With PO accessibility |
2.3 million |
| (Net opened since April 2003 |
1.5 million) |
8.3 Impressive net openings are reported each quarter,
viz:
| April—June 2005 | 147,767
|
| July—September 2005 | 137,994
|
| 285,761 |
but the net increase in PO accessible accounts over the same
half-year period was only 51,777 or just over 3000 per institution;
this suggests that progress towards target is not as healthy as
claimed by the industry.
8.4 Consumer bodies have questioned the value of account
numbers per se as a measure of reducing financial exclusion and
that more research into the use made of these accounts is required.
CCBS supports that suggestion.
8.5 Given the heavy concentration of the financially
excluded in urban areas of high deprivation, a neutral "shared
branching" facility as proposed by CCBS would be an ideal
location in which to promote basic bank accounts and educate holders
in the use of them to gain full benefit from, for example, direct
debit fuel discounts. Account opening could be delegated or on
a rota basis.
9. POST OFFICE
BANKING
9.1 The future banking role of post offices needs to
be seen in the context that the UK Post Office lacks the historical
market position as a major provider of current and savings accounts
in the manner of postal networks in Europe (especially France
and Germany), Japan, etc. The Girobank opportunity was wasted
and the National Savings link has been diminished of late.
9.2 Basic Bank Accounts (See Section 8) are currently
a small market and future volume growth is dependent upon active
marketing by an unenthusiastic retail banking industry.
9.3 Post Office Card Account (POCA), in issue to over
five million benefit recipients, is nothing more than an electronic
benefit book contributing nothing to the eradication of financial
exclusion as it lacks money management capabilities. Its popularity
owes much to the influencing skills of sub-postmasters who see
its post office counter exclusivity as a unique benefit to their
non post office retail businesses. The subsidy of £36 million
pa obtained from a reluctant banking industry is due to end in
April 2008.
9.4 A major initiative by Post Office Ltd to fill the
benefits income gap is in major conflict with the aim to increase
banking access via post offices. Consequent upon its decision
to become a competitor of the retail banking sector by selling
Post Office branded financial services products (ghosted by Bank
of Ireland) further PO/bank deals are unlikely and some existing
ones (except the basic bank account) must now be at risk. Two
thirds of personal current accounts are not post office accessible
and are unlikely to become so. In the unlikely event LINK rules
are changed to permit PO membership the non refundable cost of
providing a manual counter service would be the inhibitor.
9.5 In high population deprived communities a full PO
franchise could viably co-exist with a banking "shared branching"
presence whereas in low population areas there is a case for a
postal services franchise (minus key conflicting banking products)
to be an add-on to shared branching.
10. CONCLUSIONS/RECOMMENDATIONS
10.1 The Committee is urged to recognize the serious
damage to the financial inclusion agenda if the main high street
banks, which effectively control the transactional banking market,
are allowed to continue deserting areas of highest financial exclusion
without government sanction.
10.2 The Committee is urged to acknowledge that financial
inclusion objectives cannot be achieved solely by numbers of basic
bank accounts opened nor by reliance on post offices, credit unions
and CDFIs without a national formula to fully involve the established
and market dominant retail banking sector.
(a) The Committee is urged to challenge the banks to reconsider
the neutral shared branching alternative to branch closures and
to conduct pilot schemes, including in deprived urban areas.
(b) Given the reluctance of the retail banking sector
to tackle the issues of financial exclusion without government
pressure and/or legislation, the Committee is urged to recommend
to HM Treasury a universal service obligation for the provision
of transactional banking services that would place the weight
of responsibility on the industry to consider constructively all
the options, including neutral shared branching.
January 2006
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