Last week the Archbishop of Canterbury called for at least one bank to be broken down into being a ‘regional lender’ after he spent time on the Parliamentary Commission for Banking Standards. Some banks, he said, were becoming ‘big and complicated’ and ‘unmanageable’.
Whether the dismantling of a bank becomes reality or just matter for debate, the industry faces a more pressing and actual challenge: new rules coming into force in September to shorten the time it takes people to switch their current accounts. The high street banks will need to sharpen up their acts – and fast.
The number of people switching their current account to another is likely to more than double when the new switching regulation comes into force in September, according to research by global consulting firm Simon-Kucher & Partners.
The new rules, designed to increase the level of competition on the high street and make current account switching trouble-free for customers, will cap the time it takes to transfer customer current accounts to another provider, including all direct debits and credits, to seven days.
Last year, between 2.5 and 5 per cent of people switched, according to The Payments Council and Simon-Kucher respectively and the research predicts this will increase to between 6 per cent and 12 per cent. While current accounts do not net much profit for banks, it is the other services people buy through having a current account that may be affected, suggests Ben Snowman, director of Simon-Kucher and author of the study.
“When someone has a current account with a bank, that bank will probably get their savings, credit card and mortgage business as well. There’s huge rewards for any bank that has a current account customer,” he says.
The survey, which polled 1,000 people online across the UK, shows which banks people would consider switching to when the new rules kick in.
For example, 36 per cent of NatWest customers who would consider switching think they would move to Halifax, 33 per cent to Lloyds TSB and 32 per cent to Barclays. Of the Halifax customers considering switching, 36 per cent think they would go to Barclays, 40 per cent to Lloyds TSB and 36 per cent to Santander.
“Let’s say you’re Halifax and 36 per cent of your customers are likely to be attracted to Barclays. What the research is telling you is: ‘keep an eye on Barclays, see what it’s doing in terms of its propositions and pricing’,” says Snowman. “What is it doing differently to you?”
The research also tells banks which brands their customers are less attracted to and which challenger brands are attractive. For example, 15 per cent of Halifax customers are attracted to Tesco Bank compared with only 6 per cent from Barclays.
“There’s a lot of talk about Tesco launching a current account and what this research suggests is that when the new switching rules go live, the chances are that more of its customers will come from Halifax than Barclays,” says Snowman.
Nineteen per cent of Lloyds TSB customers polled say if they were to move, they would go to Virgin Money – another challenger, while 14 per cent of Santander’s, NatWest’s and Halifax’s say the same.
“These findings show that there’s a latent demand for what we’re trying to do – and they are clearly encouraging for us,” says Virgin Money head of media and external affairs Scott Mowbray. “We need to continue building our proposition so that when we launch our products, those people are actually inclined to switch.”
In total, 37 per cent of respondents would consider moving to a challenger brand, of which Virgin Money is the most popular, followed by Tesco Bank, then M&S Money and finally Sainsbury’s Bank.
“They’re not necessarily known well for banking but are strong brands in their own right. They’ll probably be quite successful,” says Snowman.
He warns that more competition on the high street and greater ease and speed of switching will challenge the dominance of the ‘Big 5’. “Whether that means they are simply dented or substantially reduced remains to be seen,” he says.
“There have been numerous competitors coming in over the past 12 to 18 months,” says Nationwide marketing director Andy McQueen. “And that is better for customers and therefore for Nationwide. We think our products are strong and stand the test of strong competitors coming in.”
Current account customers at the top seven high street brands show differential loyalty when buying ISAs from their bank, according to the research. Nationwide customers are the most loyal, with 30 per cent of its current account customers also holding a Nationwide ISA. In contrast, only 11 per cent of current account customers at The Co-operative Bank also hold an ISA (see chart below).
“Nationwide is top and The Co-operative bottom, suggesting there’s something in the way they’re cross-selling to current account holders,” says Snowman.
The research also shows that The Co-operative, Nationwide and HSBC are set to have the greatest net benefit from the switching rules as they have the greatest relative appeal compared with their current market shares, although given that the Co-operative has just pulled out of a deal to buy 630 Lloyds branches this may change.
“This isn’t surprising”, says Snowman. “Nationwide and The Co-operative haven’t had Libor scandals or IT failures and they’re both positioned well: The Co-operative as an ethical bank, Nationwide as an ‘On Your Side’ building society. It comes back to trust. People trust them more than some of the others.”
Overall product holdings for current account customers have also been investigated as part of the study. Nationwide customers proved to be the most loyal with an average of 1.31 products held in addition to their current account. In contrast, customers at The Co-operative hold an average of 0.76 products, in addition to their current account.
“This is a measure of loyalty, cross-product pricing schemes and incentives and of business process,” says Snowman.
“With the new seven-day switching service, banks need to ensure that they are able to leverage this change in order to retain existing and attract new customers,” sums up Jens Baumgarten, banking partner of Simon-Kucher. “This transformation in the market can be used to innovate product offerings to attract customers but also gives banks the opportunity to review their pricing models.”
The switching regulation is set to have a big impact on the current account market and brands will need to offer a good proposition to retain and attract customers in what is becoming an increasingly competitive market.
Customer strategy and marketing director
I’m not surprised at the research findings. We know our customers are loyal to us and it is trust that’s really showing through at the moment, as most of our competitors don’t share that same trust with consumers. The research shows that people have many products with us but also that they stay with us. We treat our existing customers, if not the same, then better than new customers. If customers were going to leave us, where would they go? For us that’s quite an unusual statistic. We tend to be net gainers against pretty much everyone. We have no specific activity planned for September. We handle a lot of switching and the timescale is close to seven days already, so we are confident in our processes.
Head of media and external affairs
We are working on our current account proposition and are focused on making sure we’re ready for the seven-day switching.
You’re more likely to change your spouse than your current account as the saying goes. The big four or five banks hold most of the current accounts. It’s a market that requires competition, which the seven-day switching is designed to do. One of the key things we’ve tried to do is make our products easy to understand, simple, fair and transparent. Products that ultimately have no sting in the tail. Virgin, as a group, is a trusted brand. Trust has been damaged in banking and one thing that challenger banks will do is play a significant part in restoring that trust.
The Post Office
The Post Office, which was not included in the research, is also set to launch a current account this year. No details have been released as yet but it will initially be available in a small number of branches before a wider roll-out in 2014.
The Post Office, which has 11,500 branches, already offers a range of financial products, such as savings accounts, mortgages and insurance, through a link with Bank of Ireland. The current account launch is a return to this kind of banking for the organisation – it was the home of the state-owned Girobank until it was sold to Alliance & Leicester building society in 1999.
“I think the Post Office will be relatively successful,” says Ben Snowman, director at Simon-Kucher & Partners. “The bulk of new current account sales happen in branches and the Post Office has the most extensive branch network of any financial services organisation in the UK. The chances are, because it has the distribution, it will be very successful.
“The Post Office also has something in common with the challenger brands in that it’s not a bank,” adds Snowman. “People will be more inclined to trust it – it hasn’t had any libel scandals or IT failures, for example. Given the heritage of the Post Office, it will probably come up with something that is in line with what the Government would hope to see: something very simple, transparent, offering fair value to all – a socially responsible account.”