Examination of Witnesses (Question Numbers
120-139)
MR PAUL
SMEE, MR
STEPHEN LOCKE
AND MS
SANDRA QUINN
16 MARCH 2010
Q120 Nick Ainger: When you try and
address the points that Mr Tyrie and the Chairman have made in
terms of cost benefit analysis, will you be taking into account
again the evidence from Geoff that moving to an alternative system
may well involve senior management within a small business, of
being actively involved in making and receiving payments? That
clearly is a substantial increase in the costs on small businesses
and a diversion of key management to what currently is a relatively
junior task; would you accept that that is an issue?
Mr Locke: I think it needs to
be looked at. I would hope that it is a one-off cost in terms
of involvement in changing from one system to another, but the
transition costs quite clearly do need to be looked at. I think
that also bears substantially on the banks in terms of the quality
of the information and the quality of the support that they are
able to offer. Again, that will be one of the things that we will
be looking at because it will quite clearly have a direct influence
on acceptability.
Q121 Nick Ainger: Coming back to
costs, Consumer Focus say that one of the advantages for businesses
continuing to use the cheque system is that introducing electronic
payment imposes significant increases in cost for them, not just
in their operational but actually the charges that are implemented
by the banks. Do you accept that in fact the banks are acting
as a deterrent in their charging structure for electronic transfers?
Perhaps Mr Smee will know.
Mr Smee: I take what Consumer
Focus say at face value; what I do believe is that we have tried
to cater for this in setting the tests which we have put for 2016.
Because if the charging structures are inappropriate—and
clearly I do not have a say over charging structures—then
alternatives to the cheques will not be being used and the test
will fail and the target for closing the cheque clearing will
be revised.
Q122 Nick Ainger: Perhaps you can
help us: what is the difference in costs for processing a cheque
compared with the cost for electronic transfer, within the banks?
Mr Smee: I think it is very difficult
to give an instantly straight comparison because it is a quite
complex sum. I can do a note on the complexity of it—
Q123 Nick Ainger: Hang on! I think
you have told us that within that £950 million cost saving
is a significant reduction in processing costs.
Mr Smee: We reckon—
Q124 Nick Ainger: You have produced
this highly controversial recommendation and yet you do not appear
to have done basic analysis. Surely part of it would have been
a cost comparison between processing a cheque and processing electronically.
Mr Smee: The full unit cost of
processing a cheque to a financial institution is upwards of £1,
it is around £1. The typical cost of moving to something
different from that is about a third lower. It is on that basis
that we came up with our cost savings for financial institutions.
Q125 Nick Ainger: So it is about
30 pence compared with £1?
Mr Smee: Yes.[1]
Q126 Nick Ainger: Could you explain then
why small businesses believe that by moving to an electronic system
of payment they are faced with substantially more costs by the
banks? Are the banks profiteering on this issue?
Mr Smee: I think you would have
to look at the relationship between the small business and the
bank in the round. I think the tariffs are very different between
banks and the services which a bank offers is different to different
customers. I think that there is a concern—certainly I can
understand the concern—if businesses are saying that they
are being forced into something which is less economic for them.
However, I believe that we have catered for this in our project
by saying that the only way in which we would proceed towards
confirming the closure of the cheque clearing is if these alternatives
are being used; thus the businesses will have to have found them
more attractive, for whatever reason, and cost will clearly be
an important part in that.
Q127 Nick Ainger: I come back to
the point about the purpose of the various forums on the Payments
Council. If small businesses are still saying to you in four,
five, six years' time, "Sorry, we do not like these alternatives
and we want to carry on with the cheque system" are you going
to abide by that?
Mr Smee: That would be an extremely
important factor in coming to a conclusion on whether the criteria
were met, and those criteria will be public.
Q128 Nick Ainger: But the worry is
that you do not appear to have taken into account what they have
been saying now.
Mr Smee: With respect, I do not
think that is the case; I think we have listened very carefully
to small businesses and indeed some of their organisations have
said they support this concept of the managed decline as opposed
to standing back from the situation. We are very concerned—and
are continuing to have dialogue with them—to understand
what needs have to be met were the cheque clearing to be closed.
Q129 Chair: Mr Locke, you have said
that banks should come up with alternative systems but surely
you should be working with the BBA on this and, as Mr Fallon said,
there was no submission from them on that.
Mr Locke: I will have to defer
to my colleague in terms of his perception of the relationship
with the BBA; they are a trade organisation which could express
interest in the topic, but they have chosen not to do so. We do
hear a lot from individual banks, quite obviously.
Q130 Chair: But they speak for all
the banks.
Mr Smee: I think generally in
the area of payments they have deferred to the expertise of the
Payments Council. They do send in a lot of submissions to committees
on various topics.
Q131 Chair: That is the first time
I have heard the BBA deferring to anybody! Come on, give us another
one!
Mr Smee: Perhaps I should change
the word!
Q132 Chair: Exactly!
Mr Smee: But they have at times
not expressed a view on payments issues.
Q133 Mr Fallon: But would it not
be much more honest to have worked with the banks and the BBA,
to have looked at all the different alternatives to this to see
if there were viable alternatives before coming along and proposing
an end date?
Mr Smee: I think we have found
that three things have happened because we proposed an end date.
First of all, we have had a much richer dialogue with groups who
have come forward to us. It is very difficult to get people interested
in an abstract concept of payments. There has been a far greater
contact and dialogue since we made the announcement. Two, I believe
that by setting a target we are going to encourage innovation.
I think there is a lot more interest now in developing the alternatives
to the cheque. Three, I think we have helped those who wish to
move away from cheques—and I do not think we should ignore
the fact that there are many businesses who wish that the cost
of issuing cheques did not fall on them. We have enabled them
to plan with some certainty. I do believe that setting the target
date was right. It was a close call but I think it was right because
it will enable us better to meet the needs of those who currently
rely on cheques.
Q134 Mr Fallon: When you say it was
a close call, do you mean some members of the Council were unhappy
about it?
Mr Smee: No; but it was a decision
over which we agonised and decided this was by far the best means
because it enabled us to manage what was going on.
Q135 Mr Fallon: It was a unanimous
decision, was it?
Mr Smee: I think there was one
anti voice—it was not an independent director.
Q136 Mr Fallon: Was this taken before
you lost your Chairman?
Mr Smee: No, it was taken under
the interim chairmanship of Martin Cave, but the previous Chairman
had been very involved in all the discussions leading up to the
decision.
Q137 Mr Fallon: But you do not have
a Chairman at the moment, do you?
Mr Smee: We expect to make an
announcement imminently.
Q138 Nick Ainger: Coming back to
this issue of consultation, I was referring to small businesses
and their feeling that perhaps they had not been properly consulted,
but they were not alone, were they? The National Pensioners Convention
also was critical of the poor quality of the consultation. Clearly
there have been serious problems with a number of the consumer
organisations. First of all, what lessons have you learnt from
this process so far? What guarantees can you give us that the
consultation process will be much better when we are moving towards
a decision on the abolition?
Mr Locke: I have been very concerned
throughout that the consultation process is as fully inclusive
as it possibly can be. We have absolutely no interest in ignoring
people's views—none whatsoever. Certainly in terms of the
Consumer User Form that I chair I have been very active in identifying
new participants and those who have a contribution to make. I
am sorry that the National Pensioners Convention, for example,
simply did not raise their heads at the appropriate time, but
if they wish to make representations and they wish to talk to
us and they wish to participate, of course we will be happy to
do that. The fact is that this issue has become more interesting—I
believe one of the achievements we have made—because of
the plan that we have introduced and the way in which it has been
set, and it is often easier for bodies to get involved in discussions
about something relatively concrete than in strategy, with a small
"s". As time goes on I expect the number of interested
parties to increase and that is positively welcome. Certainly
as far as my role is concerned I will seek to make it as inclusive
as I possibly can.
Q139 Nick Ainger: What do you mean
by that? Are you going to sit back? Okay it has become a controversial
issue and people are now expressing an interest, but what I am
getting at is are you going to sit back and wait for them to contact
you or are you going out proactively and seeking their views?
Mr Locke: We are perfectly capable
of being proactive and actively seeking people's views and responses,
and indeed prompting them in a way that they have not done so.
We have held, for example, a number of events where the National
Payments Plan, which was the precursor to all of this, was discussed
in some detail. Those were very well attended, but quite clearly
as we progress and hold such further discussions we need to make
sure that those are even more inclusive than they have been up
to now. From some of the bodies you have already heard from I
think there is a feeling that it has actually been quite an inclusive
process. We have indeed done some survey work amongst members
of the forums in terms of how they feel about the forums, how
they feel about the agendas and how they feel the meetings have
actually gone, and the responses to that have been very positive.
Clearly we can do better and if there are people who feel excluded
then we have more work to do.
1 Note by witness: The OFT Cheque Working Group
Report included data on a couple of case studies on the costs
of cheques for corporates, which found that cheques were 70p more
expensive than debit cards and £1.40 more expensive than
direct debits. Back
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