Written evidence submitted by Tesco Bank
EXECUTIVE SUMMARY
1. We welcome the Committee's Inquiry into Competition
and Choice in the Banking Sector and the opportunity to submit
written evidence.
2. Tesco Bank offers insurance
products, savings accounts, unsecured loans, credit cards and
travel money. We have over six million customer accounts, a loan
book worth £4.8 billion and total savings deposits of £4.5
billion.
3. Our aim is
to bring simplicity to a complex market, and to give banking customers
the same good value and service that customers receive in Tesco
stores. Our longer-term goal is to create a full-service retail
bank for Tesco customers, offering more services through branches
in our stores as well online and by telephone.
4. We are a small player in most
of the banking product markets in which we operate, with currently
no presence in the two most important retail financial product
markets, namely current accounts and mortgages. This, coupled
with Tesco Plc's experience of bringing competition into new markets
and championing the cause of competition, gives us a unique perspective
on the opportunities that exist to improve competition and therefore
consumer choice in the banking market.
5. It is through competitive markets
that we see innovation and positive outcomes for customers, in
terms of choice, service and value. This means markets in which:
- real choice exists and is easily
accessible—simple, easy product comparisons and switching
information;
- a level playing field, such as is
created by access to information (or undermined by the lack of
it); and
- the regulatory system is simple,
risk-based, proportionate, does not impede market entrants and
small players and actively encourages competition;
6. Our experience has shown that
there are three main factors which advantage the large incumbent
players and act as barriers to effective competition and market
entry:
(i) Barriers to switching.
Personal current accounts are fundamental to building a relationship
between banks and their customers. However consumers rarely switch
due to the perception (often borne out) that doing so would be
difficult, time consuming and costly. They can also find it difficult
to compare different product offers, particularly given often
complex charging structures. There are cultural and systemic reasons
for this inertia. But the result is reduced competition.
(ii) Access to information.
To ensure that we lend responsibly banks must capture and validate
detailed information on a customer's overall financial position.
This favours the large current account holding banks who have
access to this data and the network to meet the customer face-to-face.
Furthermore, the established banks routinely share current account
data which can be used to calculate income and expenditure, as
well as wider product holdings, through a closed user group. This
puts smaller players at a disadvantage.
(iii) Regulation. There is a clear need
for a proper and robust regulatory system. However the current
regulatory framework is complex, lacks
transparency and is subject to constant change.
This makes it difficult for smaller banks in particular to navigate.
7. We provide more detail on our
concerns in these areas in the response that follows.
PROMOTING
COMPETITION
AND
CHOICE
8. As summarised above, we believe
that barriers to effective competition exist in three main areas:
I. Practical - barriers to switching
9. It is well-known that a current
account offer is fundamental to building a strong and wide customer
base; it is the core gateway and relationship product. As the
OFT's review of Personal Current Accounts (PCAs) in July 2008
stated: "Consumers often select additional financial products
from a bank with whom they have an existing relationship, without
shopping around." It also highlighted
low levels of switching as one of six potential barriers to entry
and expansion in this market.
10. Around 95% of the adult population
already has a current account. Therefore, the focus for new entrants
is necessarily on encouraging customers to switch. However, the
switcher market is small. Recent customer
research showed us that over half of customers have never switched
their current account and more than two in five customers have
been with their existing provider for ten years or more. Each
year, as few as one-in-seventeen people switches their current
account[92].
Therefore, building up a reasonable customer base is a significant
issue faced by any new entrant. By comparison, in our grocery
business, consumers can and do switch on a regular
basis. For example, over the past year, the
average value of sales in any 12 week period moving between Tesco,
Sainsbury's, Asda, Morrisons and Waitrose was around £1bn,
with each retailer gaining and losing customers as a result of
stiff competition and low barriers
to switching.
11. The effect of this inertia is most seriously
and negatively felt by new entrants seeking to establish themselves
in the current account market. Such players are placed at a further
disadvantage by the ability of the incumbent banks to offer attractive
rates to new customers, which they pay for by giving very low
rates to their existing customers. This is also common practice
in the savings account market.
12. There are a number of explanations
for this customer inertia. Dissatisfaction with their existing
bank (e.g. heavy charges or unhelpful staff) or occasionally an
attractive offer from a competitor (eg better account features
or a switching payment) can encourage a customer to switch. But
the overarching view of customers is that switching their current
account is difficult, time consuming and costly. The problem is
not necessarily with the banks—who have established dedicated
switching teams to ensure a smooth process—but with a customer's
Direct Debit payments. Notwithstanding that the Service User's
Guide and Rules to the Direct Debit Scheme states that service
users must action change of account requests within three working
days of receipt, all too often these companies (utilities, councils,
telecoms and media providers) either continue to take money from
the wrong account, or finding that they cannot threaten to cut
off the service. This causes much frustration on the part of the
customer and this frustration is often misdirected at the banks
13. Another barrier to switching
is the difficulty that consumers face in accessing information
about the different products and services available. Feedback
from our customer research, tells us that in many cases, consumers
do not understand banks' charging structures. This adds to the
perception that it is easier to remain with their existing bank.
We are committed to keeping our pricing and communications with
customers simple and transparent.
14. Much work has already been done
to encourage switching but has failed to deliver the desired results.
Given the importance of this switcher market to competition, it
is vital that a proper, simple, robust switching process is put
in place to ensure that all parties perform their responsibilities
in a timely fashion. This could
be through:
- penalties—the company forfeits
payment for the month if they attempt to take funds from the old
account;
- incentives—league tables for
the best/worst performers;
- contractual liability to the customer—the
Direct Debit payee is liable to pay damages for late transfer;
or
- enforcement through a central agency,
possibly funded by Direct Debit payees, which would undertake
the switching process on behalf of customers.
II. Access to information—a
level playing field
15. There is, rightly, an increasing
focus on responsible lending—most notably in the OFT guidance
published recently[93]
but also in the FSA's approach to the supervision of banks and
the recently published consultation on affordability tests and
income verification for mortgages. However, this places an increasing
burden on lenders to capture and validate detailed information
on a customer's overall financial position, and favours the large
current account holding banks which have access to this data and
the infrastructure to meet the customer face-to-face. In addition,
the established banks routinely share current account data on
income and expenditure, as well as wider product holdings, through
a closed user group which only those with a sufficiently large
current account base (as determined by the bank members themselves)
can access.
16. This access to shared information
gives the large banks sight of information about account movements
which can help demonstrate income and expenditure without having
to take the customer through a detailed application and verification
process. This is particularly useful in low value, unsecured lending—such
as credit cards and loans—where customers expect a quick
and easy process. Without access to this data, verifying income
and expenditure can involve the customer in protracted postal
correspondence, filling in budget forms, sending in copies of
payslips etc. This gives a competitive advantage to the established
banks because it means that customers without the time and patience
to go through a lengthy application process will chose their current
account provider, potentially missing out on a better deal at
a smaller bank.
17. Given the essential nature of
this information and the additional requirements on banks to ensure
that they are lending responsibly, we question whether denying
access to this data to small banks or banks not offering current
accounts is in the interests of effective competition.
III. Regulatory
18. Another barrier to entry comes from the current
regulatory framework.
We recognise that there is a clear need for a proper and robust
regulatory system to ensure that the market functions properly
and consumers are protected. Regulation may also have a role to
play in delivering better outcomes for currently disengaged
consumers (by increasing competition and excluding from the market
irresponsible or unsafe institutions). But
it is important that regulation is risk-based, proportionate and
consistent or it could have the perverse effect of discouraging
new market entrants.
19. We have a number of concerns
about the current regulatory system:
- There is a lack of certainty
about the process and outcomes.
The timeline and the requirements for the FSA approval process
are unclear. We recognise that imposing statutory approval deadlines
or strict requirements on the FSA may not be appropriate, but
target deadlines and more detailed guidance would provide greater
clarity and transparency about how long it will take and what
is required. This could include setting out the key steps within
that process and the administrative timetable to which the FSA
and applicant will work. This would make it significantly easier
for businesses to plan and make the necessary arrangements for
product launch (involving staff recruitment, new systems and training
and customer communications). By way of example, the FSA guidance
indicates that the Variation of Permissions application will take
six months from submission to the FSA. However, should the FSA
choose to 'stop the clock' with questions or new requirements
on any specific aspect, this creates uncertainty on the end deadline
and therefore uncertainty in programme launch plans and the required
resource of the applicant up to this point.
- There is a lack of stability
and consistency. Constant
regulatory reform and a lack of consistency between the UK, Europe
and beyond create instability and make it very difficult to plan
and make long-term business investment decisions. It also diverts
resources away from developing new products and the business,
as they are instead focused on implementing regulatory change,
and creates an additional compliance challenge. An example is
in the area of consumer credit, where changes were made to the
Consumer Credit Regulations in 2005, 2006, to the Act effective
in 2007-08, via the Payment Services Regulations in 2009, by the
introduction of the Lending Code in 2009-10, the OFT's Irresponsible
Lending Guidance in 2010, the upcoming implementation of the Consumer
Credit Directive in 2010-11 and the additional review of consumer
credit announced by BIS on 14 July 2010.
- It is resource intensive, particularly
for smaller banks. As the
above example highlights, there is a huge volume of regulation.
And it is not clear that all regulation is necessary (as there
has not in the past been the discipline of removing redundant
regulation). The move to principles-based
regulation is an example of an approach that has posed a disproportionate
burden on small banks such as ours. Banks are expected to interpret
and justify their approaches in the context of guidance, rather
than prescribed rules. This requires an additional level of experience
and expertise, either requiring resources internally or costly
external advice. To manage the regulatory
requirements and the relationship with the regulator, our business,
with a relatively small, low risk banking offering, requires a
team of 16 specialists in addition to the large amount of senior
management time for regulator engagement. In addition to the cost
of monitoring and compliance, regulation also creates cost by
requiring businesses to make certain investments in infrastructure
and systems—for example the Anti-Money Laundering or Know
Your Customer and Information Security requirements. This adds
to the already high costs of IT and systems needed to operate
in the banking industry. Moreover, much of this investment is
required prior to revenues being generated.
September 2010
92 Source: GfK NOP. Back
93
Irresponsible lending-OFT guidance for creditors, March 2010-http://www.oft.gov.uk/shared_oft/business_leaflets/general/oft1107.pdf. Back
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