Banks are raking in the profits but neglecting their customers
HAVE you seen the Little Britain sketch in which a customer asks their disinterested bank clerk, Carol, for a £2000 loan?
Carol Beer nonchalantly types some data into her terminal. After the numbers are crunched she replies: “Computer says no”.
The customer then tries a range of other options, including requesting a smaller loan and to see the manager. But each time Carol comes back with the same response: “Computer says no.”
The sketch is funny because it is close to the bone for many viewers. Most could probably say their own experiences of their banks has verged on the depersonalised, Kafka-esque experience portrayed in the David Walliams/Matt Lucas spoof.
Yet over the current reporting season the UK’s nine listed banks are expected to declare combined pre-tax profits of more than £34 billion for 2004, almost 25 per cent up on the previous, bumper year.
The reporting season kicked off in earnest last Thursday with Barclays, which reported profits up 20 per cent to £4.6bn, and ends with results from Lloyds TSB on March 4. HSBC’s profits alone are expected to top the £9.8bn net profit that was announced by Shell earlier this month. Royal Bank of Scotland is not far behind with expected group profits of £7.9bn.
The profits have been swollen by an unprecedented consumer and corporate borrowing spree that has been stimulated by historically low interest rates.
While it must be remembered that a significant proportion of the total profit figure stems from activities such as corporate lending, investment banking, derivatives trading and overseas operations, is there some kind of disconnectedness here?
There’s a growing suspicion among consumer groups that banks are only able to rake in such mind-numbing sums because they are cutting corners where service to UK customers are concerned.
There is evidence that the UK market — still known as “Treasure Island” to global car makers because of consumers’ willingness to pay over the odds for motor vehicles — is also seen by bankers as less fiercely competitive than some overseas markets.
Alfredo Saenz, chief executive of Banco Santander, suggested as much when outlining his £8.9bn bid for Abbey last July. He said: “We like the UK market, we think it is one of the most attractive in Europe and has rational competition with rational competitors.”
The Spanish banker’s implication is that bank competition is fiercer elsewhere. To reinforce the point, Saenz said: “Profit from UK banks is three times the amount made by French banks and seven times the amount made by German banks.” There is also evidence that other overseas players are attracted by higher margins in the UK — both Citigroup and Bank of America have repeatedly been linked with possible acquisitions in the UK market.
Some commentators believe Britons get the banks and the levels of banking innovation they deserve. The argument is that because we’re not really alert and discerning enough as consumers — after all, research shows we change our bank account as infrequently as we change our spouse — we have low expectations of the banks.
Ed Mayo, chief executive of the National Consumer Council, accuses the banks of exploiting this consumer apathy and notably our reluctance to switch accounts to swell their own profits. Mayo says: “Our concern is that the only reason the banks can get away with providing such a poor service and still make such high profits is because we as consumers let them get away with it.
“Our calculations show that if UK consumers were to switch to the bank offering the best rate on offer, they would be better off to the tune of £15bn per year.
“There is a yawning and growing gap between levels of bank profit and customer satisfaction. The work we do at the NCC with consumers shows that satisfaction is at rock bottom, lower even than for doorstep salesmen and far, far worse than for supermarkets.
“But we could be seeing the beginnings of a consumer backlash. Levels of switching between banks is growing with 1.1 million customers transferring their account in 2003. That is almost double the figure in 2002.”
Mick McAteer, policy adviser at Which?, adds to the chorus of disapproval: “We have no problem with the banks making profits, as long as they’re doing it in a competitive market. But we do not believe that competition is working in the UK. If it was, bank profits would be less high and better-value providers would find it much easier to break into the market.
“My main concern is that, ever since the wholesale conversion of the building societies to banks in the 1990s, there has been a levelling down in the area of savings and loans, traditionally the domain of the building societies. “The UK consumer is losing more than £3bn a year on savings and loans because all the major providers are now having to pay dividends to shareholders.”
The lack of financial biodiversity — with all the major providers except Nationwide now being quoted plcs — is bound to arouse suspicions that the banks might be operating as a subtle cartel.
Mayo says: “The banks like to argue that the UK is a very competitive market. But the Cruickshank Report pointed to a lack of competition both in small business banking and in payment services.”
Mayo says the biggest gripes of UK consumers are not necessarily with a lack of innovation and a lack of integrated data systems, but with the very basics.
He says NCC research shows consumers are dissatisfied with, in order, queues in branches/a lack of cashiers, call centres, the quality of service, sales drives and last but not least clearing times.
A report published last month by management consultants Booz Allen & Hamilton, based on mystery shopping in branches and telephone interviews with customers, found UK banks to be among the worst in Europe in terms of meeting customers’ needs in branches.
“Swiss banks currently set the benchmark in Europe on all parameters, particularly customer insight,” says Alan Gemes, head of financial services at Booz Allen & Hamilton. “The UK scores less well, with staff not always able to answer questions, long queues and limited use of customer data in branches.”
British bank staff ranked bottom, alongside those in Spain, in their ability to answer specific product questions. The report stated: “Most calls were referred to a specialist, who was still uncertain.” They were also seen as the coldest and least friendly in Europe.
The only area where UK staff excelled was the speed at which they completed sales — hardly a recipe for respect and perhaps indicative of a severe cultural problem inside UK banks. Even though British banks were perceived as having “relatively good opening hours” and their literature as being accessible, only 20 per cent of UK consumers regard their bank as their main supplier of financial products — the lowest ratio in Europe.
This is likely to spell trouble for the high-street banks as they seek to transform themselves into financial services supermarkets, under the new “depolarisation” rules that were introduced by the government in December 2004. They have already been facing an uphill struggle in their attempts to transform themselves into bancassurers, sufficiently trusted to sell life assurance, investment and pensions products “to go”.
The Booz Allen & Hamilton findings were reinforced by a study from fianancial servies and telecoms benchmarking specialists Finalta. The study assesses the branch service capabilities of 17 European banks and building societies found that, on average, customers’ satisfaction with their banks had improved by an annual rate of just 0.1 per cent per year since 2000. Finalta consultant Keith Gold said: “Customer expectations are rising at a faster rate than banks’ ability to deliver.”
“UK banks have done a first class job in delivering telephone and internet services. But their focus has not been on the branch for a little while.” However, Gold says that, after half a decade of neglecting their branches UK banks, have finally recognised that branches do matter, and are refocusing their development efforts firmly back on the branch.
He says the banks have belatedly realised that if levels of customer service in the branch can be improved — and industry experts insist they’re doing this — then customers might become more loyal, and more willing to entrust their wider financial needs to the banks.
Gold believes that a corollary is that banks are going to seek to transfer transactions that are more conveniently carried out through alternative channels, such as the internet, out of their branches to free up tellers’ time to handle more valuable transactions. Eddie Keal, banking solutions manager at IBM UK, believes UK banks started to neglect their branches in the 1990s when they became mesmerised by the cost-saving potential of developments such as the internet and call centres.
As a result the traditional bank manager — a trusted advisor who knew their customers well, and who was given real autonomy in deciding how to allocate products, and who was often in the “Captain Mainwaring” mould — became extinct. Instead such figures were replaced by inexperienced junior bankers seen in the trade as “spotty 17-year-olds”.
During the dotcom bubble some bankers convinced themselves internet banking would sound the death-knell of “bricks and mortar” banking. Since the cost difference between a branch transaction and an internet one was 100 to one, it seemed like a “killer app”, that would destroy the traditional branch banking model and boost profits even more.
According to a study by the Campaign for Community Banking Services, the big four high street banks closed around 2,500 branches in the decade up to 2003. This period of neglect, when branches were left to wither on the vine, is the main reason current levels of consumer disenchantment are so high, argues Keal. He adds: “What we’re now seeing is the re-empowerment of the branch. That has been driven by a desire to dig deeper into each customers’ pocket.”
Royal Bank of Scotland, which owns NatWest, has re-opened two branches in the past 18 months and recently took on 1,000 extra staff to reduce queues.
But what is it like in other markets? Are our banks really neglecting investment in R&D, innovation and customer service in order to boost profits? Evidence from Switzerland suggests that retail bank profitability and levels of service and innovation may be inversely proportionate to one another.
Finalta’s Gold says: “The Swiss are head and shoulders above everybody else in terms of service in bank branches. But, in a business sense, you couldn’t find a more troubled market. The banks there are losing money in a dramatic way.”
Gold rates Scandinavian banks — including Sweden’s Handelsbanken, Finland’s Nordea and Denmark’s Danske Bank (which recently bought Belfast-based Northern Bank from National Australia Bank) — most highly. “They were ahead on the internet and have already had time to refocus on their branches again. So they’re much healthier now,” says Gold.
Handelsbanken, winner of Scandinavian retail bank of the year in last year’s Retail Banker International awards, has made its branches the base for all its operations.
Industry observers are divided about South African banks. While some are shocked that they charge their own customers a fee just to set foot in their branches, IBM’s Keal favours such an approach, likening it it to “congestion charging for roads.”
He says he admires South Africa’s banks for their take-up of technology and range of options available at cash machines. “You’ve been able to top up your mobile phone at South African ATMs for years. But banks here are only just beginning to experiment with that.”
Banks in the United States are not rated highly by European experts.
Gold says: “US banks are almost primitive compared to what we have in Europe. Most are still totally wedded to their states. I certainly do not find it [the US] to be a high service culture. Things we take for granted cannot be delivered by US banks.”
By contrast Keal says that UK banks do deserve a lot of credit for the investment made in their networks. “Customers don’t see it but it makes a tangible difference when it comes to customer services.”
He accuses customers of protesting too much. “We are still living in a free banking world. People do take that for granted. The true cost of running their current accounts is at least £10-£20 per month. We are not hard done by.”
And a British Bankers Association survey, conducted by the consultants Oliver Wyman & Co, admittedly a couple of years ago, shows that Britons pay on average £49 per year for their banking services. In the US the figure was £178 and in Spain it was £213. On average the total charges were 70 per cent less than in a basket of other developed nations.
Nick Clarke, analyst at stockbrokers Charles Stanley, believes that 2004 may anyway represent the apogee of UK bank profitability. He forecasts that declining interest rates — they are widely seen as having peaked at 4.75 per cent — a slower housing market and increasingly financially literate consumers will eat into future profits.
He said: “Banks’ margins have been dropping for a few years now because consumers are becoming more savvy, and there are fewer people paying standard variable mortgage rates or leaving money in uncompetitive savings accounts. We also believe unsecured lending revenues, excluding credit cards, will disappoint after a better-than-expected 2004.”
But will the prospects of some future fall be enough to take the edge off the dissatisfaction over the level of profits the banks are currently reporting? “Customer says no.”
TOP BANK BEEFS
ATM CHARGES: As the ATM market fragments with players such as Cardpoint buying up machines in less profitable areas, a growing proportion of ATMs are charging £1 to £5 for withdrawals. Around 1,500 of Scotland’s 4,500 machines now charge, with consumers in less affluent areas hardest hit.
BASIC BANK ACCOUNTS: Banks are dragging their feet over basic accounts, which the government wants for less well-off customers. A Banking Code Standards Board report found only 54 per cent of assessors were able to open such accounts easily.
CHEQUE CLEARING: UK banks take longer to clear payments than those in any other Group of 10 countries with some taking five or six days. But the Banking Code Standards Board claims banks and building societies are increasingly paying interest on the day a cheque is presented.
CHIP & PIN: Smaller retailers are furious about the accelerated roll-out of chip & PIN technology. The cost of fraudulent purchases authorised with a chip & PIN card must be borne by the retailer while fraud committed by signature remains the banks’ preserve. Nick Goulding of the Forum of Private Business said: “Smaller firms need more time to absorb the capital costs involved.”
CREDIT CARDS: Consumers are often misled by quoted interest rates. The banks can promote a rate as “typical” if offered to at least two-thirds of customers. But one third are likely to pay more. Bank heartlessness has recently been highlighted after several desperate borrowers committed suicide.
INTERNATIONAL CARD CHARGES: Banks often impose hefty charges for the use of cards abroad. Typically they add a 2.75 per cent conversion fee onto the price of anything bought with a credit card overseas. Banks also charge extra for withdrawals from overseas ATMs.
MORTGAGES: Last year a Treasury report by David Miles of Imperial College, London, criticised lenders for excluding existing customers from their most attractive deals. Miles said the FSA should investigate but, almost a year later, there’s been no movement. Higher lending charges are often applied to borrowers who can only place a small deposit on their home.
SAVINGS ACCOUNTS: Many banks and building societies lure in new customers with products offering market leading rates, only to slash these once enough customers have been drawn in. They also exclude existing customers from such offers. Nationwide has highlighted Halifax’s Liquid Gold account. When launched in 1984 this offered interest of 13.2 per cent against a base rate of 10.5 per cent. But the rate has fallen to 0.95 per cent on balances of £500.
SMALL BUSINESS BANKING: Since 2002 the government has insisted banks either pay interest on small business current accounts or provide free transmission/transaction charges. Since then small business organisations report some improvement, though not all banks are complying. The Forum for Private Business says banks’ failure to offer portable credit histories for small firms looking to change banks is a barrier to competition.
This article was published in the Sunday Herald omn 13 February 2005