The financial services marketplace: structures,
2.5 Banking and money transmission
Until the latter part of the twentieth century, the provision of current account services was the sole prerogative of the high-street clearing banks. The current account represents the primary means by which salaried employees receive payroll credits from their employers and manage payments and cash withdrawals.
The extent of current account penetration in a given country typically reflects the proportion of the population paid by salary. Thus, in the UK some 95 per cent of the population have bank accounts, while in India the proportion is probably around 15 per cent and in South Africa it is estimated to be between 30 per cent and 40 per cent ((http://in.rediff.com and www.euromonitor.com, both accessed January 2005).
In addition to the traditional high-street banks, building societies in the UK also often provide current accounts. Indeed, those building societies that demutualized, such as Alliance and Leicester, the Halifax and Bradford and Bingley, became known collectively as mortgage banks. This term reflects the relative importance still attached to the provision of residential mortgages, and their orientation towards the retail sector. As yet, the mortgage banks have not made any material impact upon the business and corporate banking arena. As previously observed, there is a saliency issue in that businesses do not yet view mortgage banks as being credible suppliers of business banking services. Competitive pressure has been responsible for a great deal more price-competition for personal current accounts.
The payment of interest on current account balances was almost unheard of in the UK until the second half of the 1980s. It could be argued that the rate of interest paid on the typical current account is so derisory that many consumers benefit from such payment to only a limited degree.
Current account supply has broadened ever further in recent years as a conse- quence of factors such as technological development and the arrival of the so-called
‘new entrants’. Initially, telephone banking, pioneered in the UK by First Direct, facilitated lower-cost current account provision and the payment of interest on cur- rent account positive balances. Costs have been lowered further still by the advent
Table 2.2 Customer needs and product solutions
Consumer need Product solution
A secure depository for readily accessible cash Current accounts A means of managing receipts of funds and Current accounts
payment of expenses (money transmission)
A secure depository for cash that pays interest Current accounts Deposit accounts Credit Union deposits A simple means of accumulating a fund of Deposit Accounts
cash on which interest is paid High-Interest Current Accounts Tax-advantaged cash savings for the medium term Cash ISA5(Individual Savings Account) A means of accumulating a lump sum in the medium Regular Saving endowments
to long term Regular saving mutual funds, such as
OEICS6 and Unit Trusts A means of investing a lump sum for long-term growth Mutual Accumulation funds
Investment Bonds Investment Trusts Corporate Bonds Government bonds A means of investing a lump sum to generate income Mutual Income Funds
Income Bonds Corporate Bonds Annuities
A means of saving for retirement Occupational Pension Schemes Personal Pensions
401k Savings Schemes7 Central Provident Fund8 A means of deriving income from a Pension Fund Annuities
Income drawdown9 A means of financing current consumption from Credit cards
future earnings or income Unsecured loans
Secured loans A means of financing home purchase Residential mortgages A means of releasing liquid funds from Equity release schemes
one’s residential property
A means of protecting outstanding loans Payment protection insurance Mortgage indemnity guarantees A means of protecting tangible assets from fire, General insurance
theft, accidental damage and perils of nature
A means of protecting people and organizations Liability insurance from claims for pecuniary loss arising from
negligence, oversight or non-performance of duties
A means of protecting human assets from Life Assurance
risks associated with death, illness and Critical illness insurance
medical conditions Health insurance
Permanent Health insurance
of Internet banking. This new technology has enabled new entrants to offer so-called high-interest current accounts, as illustrated in Box 2.1.
Technology and changing consumer tastes have also facilitated greater diversity regarding money transmission and payments. The usage of cheques has declined significantly in recent years owing to factors such as the growing use of debit and credit cards. According to the British Bankers Association, the number of cheques handled by the clearing system has fallen from a peak of 4.472bn in 1990 to 2.454bn by 2004. Cheque usage fell by 39 per cent between 1994 and 2004, and is predicted to fall a further 44 per cent by 2014. This has made it easier for new entrants and virtual banks to compete in the market for current accounts.
The introduction of interest-bearing current accounts has served to drive margin out of these aspects of banking. It could be argued that it has also acted as a catalyst for suppliers to become increasingly stealthy in terms of how they levy charges. UK banks and others have come in for growing criticism regarding what are often considered to be opaque charging practices. Charges for services such as unauthorized overdrafts and the presentation of cheques on accounts with insufficient funds have added to a popularly held sense of mistrust in the banks. The counter-argument is that financial institutions have to find a means of covering the costs of providing current accounts, given that they are now interest-bearing. Admittedly, providers of current accounts do advise their cus- tomers of their menu of charges from time to time – indeed, they are obliged to do so by law. However, the overall approach to charging acts to favour the finan- cially astute and well-off, whilst penalizing those who are less affluent and less financially aware.
The current account has increasingly become a ‘loss-leader’ – that is, it is seen as acting as a gateway for the sale of other products that offer meaningful margin potential. Indeed, it has been suggested that the majority of current accounts held by the typical clearing bank are loss-making. This has resulted in the need to cross- sell other products and services via what are termed customer relationship manage- ment (or marketing) programmes (CRM for short). This particular marketing phenomenon will be addressed in full in Part III of this book.
When Sainsbury’s bank launched its current account in 1992, it offered an interest rate of 6 per cent on positive current account balances. This sparked something of a current account interest rate war, with Tesco offering 6.5 per cent when it subsequently launched its high-interest rate current account, only to be topped by the Prudential offshoot, Egg, when it launched in 1995. At the time of writ- ing, Egg is the highest-paying current account provider, paying a gross rate of 5.50 per cent. However, Egg is solely an Internet bank, and consumers must judge the extent to which this offsets the disadvantages of not having access to a branch network.
Box 2.1 Price competition among Internet banking providers in the UK