Money for nothing?
It's not the way UK retail banks would have wanted it, but bank charges are the subject of public debate following a high court judgement last month which threatens to undermine long held charging policies. So what is likely to replace them?
15 May 2008
Publication
Paul Pullinger, head of UK retail banking for Capgemini, and Paul Willis, from the retail banking centre of excellence, Capgemini, by-line article - click here to see article at Financial Adviser.
The announcement by Mr Justice Andrew Smith on 24 April once again turned the
public eye onto the way in which British retail banks charge for their services.
While the judgement was keen to point out that these charges were not unnecessarily
unfair, it did take the debate to a new level, one which the UK banks had sought
to avoid.
The fairness or unfairness of bank charges will rumble on for some time yet,
however the winds of change are moving through the UK banking industry and the
charging policies they have followed for so long are likely to be swept away in
the coming months ahead.
To put these changes in context, an analysis of banking services across the globe
shows there are four main categories in which fees are charged namely:
- Account management: fees charged for the administration of an account
- Payments: fees charged for a specific payment transaction
- Cash utilisation: fees charged for depositing or withdrawing cash
- Exceptions handling: fees charged for other services such as payment stops or document searches.
It is the combinations and amounts of these charges which form part of the fee
structure of retail banks and in this regard the UK structures are truly unique.
No other country comes close to the approach followed by UK banks for charging
fees. Even countries with a similar level of financial services industry maturity
have not elected to follow the UK model.
Based on an average consumer the amount of charges levied by UK retail banks
are broadly in line with the global marketplace.
A recent report reveals that the UK consumer pays on average 75 euros in fee
charges each year. Low users of banking services pay only 14 euros while high
users can expect to pay on average 122 euros. This multiplier between low and
high users is nearly nine times compared to the global average of three and a
half times, and does show that in the UK consumers pay for what they use.
However, it is composition of the UK fee structures that sets them apart from
all other countries. In the UK the leading retail banks charge 52 per cent of
their total fees against exception handling items, with a further 43 per cent
against payment related services. Charges related to managing of standard current
accounts are small and there are no charges for cash withdrawals. Consumers can
be charged for bundles of services associated with the current account but to
all intents and purposes, provided you remain in credit, current account management
is free in the UK.
In light of the court ruling it is natural to speculate as to where UK retail
banks go from here. In this regard they must carefully consider their options,
all of which have implications for revenues, customer behaviour and ultimately
customer satisfaction.
History shows what has happened in other countries when fee structures have been
markedly altered, for example when Canadian banks raised their fees on cash withdrawals,
the consumers changed their purchasing and payment habits overnight, taking out
bigger amounts at the ATMs and paying for more via non-cash channels.
Severe shocks which have fundamentally changed the domestic market fee structure,
like the one the UK is experiencing, are rare, but they do happen. In Spain during
2006 the main banks rapidly cut their account management charges in a bid to quickly
gain market share, the resulting price war saw all the players lose considerable
fee revenue for few additional customers.
In making decisions as to which future fee structures to adopt UK banks must
consider a number of important questions:
- Do they look to blur the boundaries of the services on which fees are charged?
- Do they wish to focus on fees which influence behaviour or sales?
- What are the effects of compliance on future fee structures?
- How well do they know their customer base?
Globally we have seen the rise of fixed price charging for a bundle of products,
comprising both financial and non-financial services. The volume and pricing of
these product bundles is critical to ensure profitability, and customer segmentation
must be accurate to tailor the right product bundle to the right customer group.
Within the UK, product bundles are common within certain customer segments -
for example students, mass affluence customers - and these bundles are likely
to increase in both type and number across the bank’s customer base.
Evidence shows that for many years banks have used fees to gently steer customer
behaviour, for example steering customers towards using lower cost channels such
as the internet. Looking forward, they may apply this more aggressively and use
pricing to influence sales.
Banks have the option to increase fees on payments but they must be mindful of
payment compliance requirements when following this path. Within Europe we have
seen the single European payment area initiative encourage payment harmonisation
and a resulting squeeze in this service as a source of revenue.
Strangely, the driver to be compliant could assist UK banks in this area as the
faster payment initiative requires the quicker transfer of funds and therefore
an improved service banks might be tempted to charge more for.
If customers feel they are getting value for money with high quality products,
focused on services that are useful to them, then resistance to new charging structures
will be less. To do this successfully the banks must truly understand what is
important to their customers. The large investments they made in customer relationship
management solutions might now really prove their worth.
Given the likelihood of increased complexity in products and services, together
with the charges associated with them, the demand for independent financial advice
is likely to increase markedly as customers, especially in the mass affluence
market, seek to best optimise the cost of their financial portfolio to suit their
own circumstances.
Underpinning this debate is the simple question: should UK retail banks charge
for a service, or per transaction? The former gives the constant revenue stream
while the latter provides the greatest customer transparency and control over
their charges.
We can make the assumption that UK retail banks will want to continue to use
their fee structures both to generate revenue and influence the behaviour of their
customers.
They will also look across other markets to see what has been used successfully.
Within telecommunications we have seen a mixture of service charges and transaction
pricing with a tiered approach deployed. This provides the customer with a choice:
a flat charge to use the service extensively, or a per transaction charge in the
case of lower usage.
It is most likely a similar approach will be undertaken in the financial services
industry. Possibly the greatest challenge for the UK retail banks is going to
be defining exactly where those tiers are and how they sell this concept to the
public who have enjoyed free banking for nearly 20 years. In this regard understanding
the customer and communication of the changes will be the key.
