During a recent stay with friends in England I was appalled to see a cinema ad for Lloyds Bank, part of its £30 million “moments that matter” campaign which tries to imply that the bank has only its customers’ best interests at heart. How can the Advertising Standards Authority allow this so soon after the £28 million fine on the bank for foisting on 700,000 of its customers investment products they did not want or need?
North of the border Bank of Scotland (they are the same, since Lloyds acquisition of HBOS in 2009) uses a different tack, promising to pay for one of your purchases if you have a current account with them. Halifax (another Lloyds brand) is offering £100 to people who switch their current account.
Lloyds is spending huge sums to defend the dominant market share in current accounts it achieved with the HBOS takeover. Even after it floats off TSB next year, it will have 25% of the market. Its desperation to maintain its leadership is nothing new – as I found in Hubris, HBOS was doing the same a decade ago – but to what end?
Technological advances such as automated transfers, online banking and improvements in back office processing have reduced the cost of operating current accounts, but banks still struggle to break even on them. The Office of Fair Trading estimated that the average a bank makes on a current account is £139 a year. Compare that with the £100-150 banks are paying to acquire new customers and you can see why there is the imperative to sell other products, including investment accounts and insurance, which led to the record fine on Lloyds.
Bribes do seem to work. The market research consultancy TNS found that special offers, rewards or higher interest rates on credit balances were among the main reasons customers gave for switching their accounts to a new provider. But the gains have proved illusory for the big banks. The same study found that Lloyds gained 14% new accounts, but lost 17%. The figure for Barclays was 10% gain and 13% loss, for NatWest 7% and 13% and HSBC 4% gain compared to 10% loss.
Why do people leave? The overwhelming reason cited was poor customer service. All banks will say they are working to improve customer satisfaction, but the amount of churn in the market says they are not trying hard enough. They also assert that two-thirds of customers have been with their banks for five years or longer, but this mistakes inertia for customer loyalty. TNS also found that customers do not feel loyal to their banks, they put up with bad service because of the hassle of changing and the perception that all banks are the same.
This may be changing. In response to the OFT inquiry, the Government introduced new rules to make switching current accounts easier. It is still early days – the new rules have only been in force for three months – but early indications are that the rate of switching is speeding up and that the gainers are the so called “challenger banks.”
This is a healthy sign, but it does not mean we yet have a competitive banking market. By far the largest challengers are Santander (owned by the largest Spanish bank) and Nationwide, the only large building society left standing. Between them they have less than 15% of the market, compared to 80% for the Big Four. There is a long way to go.