I have a theory that the British retail banks – including the former mutuals – will be marginalised so much over the next couple of years that, by what many pedants call the “real” millennium in 2001, they will no longer account for the majority of what used to be referred to as cheque-book business. Although I’m not taking any bets on such a claim, I believe that this scenario should happen.
I say this for two reasons. The first is that the market for retail banking services has broadened sufficiently to draw in the big players which can afford investment necessary to take retail banking all the way into the electronic age. The most encouraging recent example of the big new entrants is the Prudential, with Egg.
The Pru cares not for the word-plays of BBC Moneybox presenters (“Is it all it’s cracked up to be?”). The branding point is that E stands for both Egg and e-commerce and, by the time Egg starts paying for itself some time close to the beginning of the new millennium, then we will be banking on whatever the new generation of domestic lap-tops have delivered us.
Previous attempts to bring financial services into the home will look as though they had simply been preparations for this moment – from the original Man from the Pru, through to telephony services, such as Midland’s First Direct. In fact, banking by phone will look like the eight-track cartridge just before the arrival of the cassette. Or, for that matter, the cassette just before the arrival of the CD.
The arithmetic makes this process inevitable. Telephone-banking services are half as cheap to run as a branch network (congratulations, Midland). Costs for telephone-banking are reckoned to be around 30 per cent of income. E-banking will undercut this figure. Trashy as its enabling services currently are, the Internet will be the obvious nest in which to hatch Egg (sorry, witless wordplays prove irresistible). Little wonder, then, that the Pru is paying savers eight per cent and lending to home-buyers at 7.99 per cent – it is worth paying to get into this market.
The imagination and foresight of those who have blazed the trail for e-commerce could be another nail in the coffin for high street retail banks. Although you don’t need too much imagination and foresight to threaten those banks that find it impossible even to clear cheques competently.
Real retailers, such as Sainsbury’s and Tesco, and the more fleet-footed life offices, such as Standard Life, have succeeded over the past couple of years in knocking down the one great marketing weapon the retail banks had on their side: inertia.
I still bank with the high street chain to which I was introduced in the early Seventies, but I suspect that I’m increasingly unusual – even for my generation. Inertia – or what the banks like to call “loyalty” – is on the way out. I imagine that a younger banking generation applies the same degree of “loyalty” to service providers as it does to its choice of mobile phone. In other words, none. Price and service reign and, if the service or the product isn’t good enough, they can be found elsewhere.
This market trend would appear to be confirmed by the Pru’s early experience with Egg. Its customers are being warned that they could face longer delays than originally anticipated – some 28 days perhaps – before their accounts are opened. This hitch is ascribed wholly to unanticipated demand. The Pru received some 65,000 telephone enquiries in the first five days after the launch – which was more than double the anticipated demand – and had more than one million Website hits.
Even allowing for hubris, that would seem to suggest that inertia in the financial services market is a fading factor. It also echoes the experience of Tesco last year, whose own banking service struggled to meet initial demand.
So where does e-banking go next? The interesting point here is one that the major new retailers of banking services are keeping to themselves. And it may be that they are deliberately hiding it behind the smokescreen of a debate over the Government’s proposed introduction of Individual Savings Accounts (ISAs) next spring.
The focus of attention, not unreasonably, has been on the mess that Geoffrey Robinson and his mates at the Treasury have made of “reforming” the savings and investments markets. It is argued that New Labour’s intentions could have been better achieved by reforming the dual bulwark acronyms of personal finance, PEPs and TESSAs. It is said that the Government’s proposed CAT mark for ISAs is a dangerous consumer assurance. It is further said that major financial services retailers, from grocers to life companies, want no part of ISAs.
Perhaps the biggest point for Robinson to take into consideration is that the poor don’t save – not because they aren’t offered the right products – but because they don’t have any money. Witness the credit card arrears rocketing in September. So forget ISAs.
But to get back to the point, what the market needs is pure cash management services in the shape of current and deposit accounts; if you like, a return to the old retailers’ Christmas clubs.
That’s what e-banking can provide with its attractive cost base. It’s business that both the Pru and Tesco should be winning from the banks.