People before profits

The Bank of England’s decision to hike interest rates for the third time in six months came as a surprise for many, not least those who will see mortgage bills rise again. However, the UK’s stable economy and relatively low interest rates have been largely responsible for it having Europe’s largest personal debt mountain, forecast to exceed £1.3 trillion this year.

But it hasn’t been helped by banks and credit card companies willing to lend money to just about anyone who cares to apply and then charging heavily when payments are missed or spending limits exceeded. With near unprecedented numbers of people unable to meet repayments (personal insolvencies are widely expected to top 100,000 this year), the financial ombudsman is taking a much closer look at the financial providers’ charges, particularly on credit cards and current accounts.

Not only is the personal debt in the UK the highest in Europe, but Britons also pay among the highest banking charges. Already, the Office of Fair Trading (OFT) has forced lenders to reduce credit card fees from £20-£25 to £12 after a ruling last April found that charges were punitive and failed to reflect the true cost to card companies. It is considering a similar move on bank overdraft charges, believing that these, too, are punitive and do not reflect true costs.

This follows hot on the heels of the OFT’s investigation into the £5.5bn payment protection insurance industry, following allegations that the insurance – which promises “peace of mind” for borrowers by guaranteeing their debt repayments in the event of sickness, accidents or unemployment – was too complex, provided less protection than customers believed and was poor value.

Fee-derived income contributes substantially to banks’ profitability and there is every indication that profits worth more than £1bn are at risk this year. Revenues from penalty charges are estimated at more than £2bn and profits on these charges are running at about 50%. Not only are banks fully aware of these levels of profitability, but they also plan for them in their annual budgets. It is hardly surprising, then, that consumer groups accuse banks of gross profiteering.

A recent survey by Business Development Research Consultants (BDRC) revealed that around 14 million adults (31%) have been charged by their financial provider in the past 12 months, largely relating to credit cards and overdraft facilities. Of those with credit cards surveyed, 14% say they had been charged for exceeding their credit limit and more than 11% charged for late payments.

The survey also shows that credit card charges are not closely linked to people’s reliance on the cards for debt management. Customers who primarily use their credit cards for benefits such as insurance cover, interest-fee credit and rewards are just as likely to have been charged as those who use them for debt management. Falling foul of charges is therefore likely to result as much from oversight as from inability to pay.

The research shows that the higher earning, more financially astute social grades are more likely to use credit for the benefits – 29% of ABs use them versus 18% of the adult population.

The youngest (under 25s) and oldest (65-plus) are more likely than other age groups to rely on credit for debt management and convenience, and less likely to use credit for the potential rewards and benefits. Only 8% of 18to 24-year-olds and 13% of over-65s use credit for the rewards or benefits compared to 18% of the population as a whole.

Banks must take a closer look at their market, particularly in relation to people’s needs for and attitudes to financial services. Banks and other financial services providers tend to be too short-term in their thinking and lack focus on what their landscape is going to look like in the future.

Financial providers who take a holistic view of their customers are more likely to prosper in an environment that is undergoing major changes. However, there is a greater emphasis on cost-focus strategies at the moment rather than strategies that are focused significantly more on the customer. This is demonstrated in part by the general impression held by many consumers that all banks are as bad (or good) as each other.

Given that their profit levels will be substantially eroded, banks and credit card companies need to be more innovative in their approach. Making threats to claw back lost revenues by levying fees in other areas is not the way forward. This will further compound consumer mistrust and demonstrate that financial services providers have lost touch with their customers.

The key to success requires marrying the top-down macro approach (brand and customer strategy) with the bottom-up micro issues to do with implementation on the ground. Sound market intelligence, effective communication at all levels, the delivery of consistent customer value, and the ability of companies to embrace change and to keep step with the market are fundamental to ensuring future success.

• Mark Long, director at Business Development Research Consultants, contributed to this week’s Trends Insight