Keywords : Accountancy
Successfully moving current account customers from a free-if-in-credit model to a fee-based packaged account is a critical challenge for retail banks in the UK. Creating more direct revenue streams from current accounts will be vital to banks, especially given the onus on cost control in 2012. This market research report looks at how banks should monetize the current account relationship through encou...
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Successfully moving current account customers from a free-if-in-credit model to a fee-based packaged account is a critical challenge for retail banks in the UK.
Creating more direct revenue streams from current accounts will be vital to banks, especially given the onus on cost control in 2012. This market research report looks at how banks should monetize the current account relationship through encouraging the adoption of fee-based packaged accountsAchieve revenue growth through understanding the obstacles constraining packaged account salesOvercome the criticisms of packaged accounts through recognising and mitigating the risks of miss-sellingFoster long term relationships with customers through learning about the value of benefit reinforcementBuild a industry leading strategy through appreciating the importance of customizationThe report aged account is already earning a significant amount of revenue for the UK retail banking industry but with growth in both the total size of the industry and the monthly fee per account, the opportunities are impressiveThe construction of the package on offer is the single biggest limitation on the size of the industry for packaged accounts. This is the clear message that emerges from the customer responses to FSCI Survey.Too few UK current account providers have attempted to create packaged products geared towards consumers' lifestyles. Rather than aiming to create a package that suits a particular consumer sector, most providers have instead relied on a price point scale alongside a roughshod premiumization of the product.What are the obstacles limiting the potential of the packaged account industry ?What makes the current account relationship so critical in the battle for retail deposits?What forces are threatening the longevity of the traditional free-if-in-credit (FIIC) business model?
Accounting And Corporate Finance Industry in the United Kingdom
OVERVIEW
•Catalyst
•Summary
•Methodology
INTRODUCTION
•A profitable distribution banking business is becoming even more important to large banking groups
- Banking chiefs will look to their distribution divisions for attractive investment opportunities
•Economic and regulatory conditions place deposit gathering front and center for distribution banks
•Current accounts provide a significant source of income for UK distribution banks
- Net interest margins and overdraft fees have historically been the chief source of direct PCA income
•The current account is critical to a bank's ability to gather deposits and cross-sell other products
- Cross-selling in the UK is comparatively low and declining, but remains a priority
- The current account relationship is a powerful advantage in the battle for deposits
- A primary banking relationship provides greater access to credit sales alongside enhanced customer information
•Consumer pressure and a regulatory spotlight constrain the earnings potential from overdraft charges
- (Untitled sub-section)
- Banks have been accused of using overdraft fees as an underhand means of charging their consumers
- The Financial Conduct Authority is coming under pressure by Which? to "keep an eye on the banks"
•The squeeze on overdraft fees could end "free" banking in the UK
- The free-if-in-credit model is currently the predominant type of PCA in the UK
- Banks will look for ways to monetize their current account relationship
•Banks need to avoid moving back to a commoditized product and must create valuable experiences
- Consumers will value and pay a premium for a quality service offering
- Banks need to deepen their customer relationships and provide a full service experience
•Placing fees directly on traditionally "free" services could provoke an aggressive consumer response
- The threat from legitimate alternatives forces the banking market to be careful with its fee structure
•Banks in the US provide an invaluable case study for the pitfalls of placing fees on core banking services
- Bank of America was forced to reverse its decision given mounting criticism and a consumer base in revolt
- Bank of America's losses have taught US banks that they must tread carefully
STRATEGY IN FOCUS
•The industry for packaged accounts is nearly 10 million consumers strong and is growing
- The packaged account industry is now worth nearly GBP 1.5bn per year and is yet to reach its full potential
•The industry is currently constrained by inflexible packages which limit customer appeal
•Packaged account providers are failing to differentiate their offerings, which is exacerbating the problem of "fit"
- The dominant high street banking players are failing to cater to a range of customer needs
•Current account providers must look beyond outdated affluence models
- Lloyds TSB offers a variety of packaged accounts but its industry ing message is off target
- Providers need to develop packages that suit the lifestyles of their target customer sectors
•Banks must utilize customer information to improve awareness and create packages that are the right fit for their target customers
- Banks need to raise awareness among their customer base with targeted communications
- Banks must utilize the information they have about their customers to direct the right product to the right customer
- Segmentation can actually lower costs through enhanced targeting of valuable consumer sectors
- The mobile phone market offers an interesting example of how to successfully brand a range of packages
•The future will bring flexible and customizable packaged accounts
- Prepackaged accounts will always have a reduced potential industry due to duplication and irrelevance
- BBVA Compass’s Build-to-Order checking account allows for personalization
•A new entrant could disrupt the industry with a fully flexible package
- Virgin Money and Tesco Bank both have the capabilities and ambition to challenge the packaged account status quo
- Customization must not come at the expense of clarity for the consumer
•Miss-selling and poor awareness of benefits have damaged perceptions of value for money
•Miss-selling is detrimental to the reputation and future of the packaged account industry
- Packaged accounts are primarily a product that consumers are actively sold, rather than one they seek out
- Incentives for sales teams must be structured carefully to ensure that long-term relationships are prioritized
•Awareness of the benefits on offer must be supported beyond the point of sale
- Benefit reinforcement should be a core part of the service in the packaged account industry
•Increased customer awareness of account features will raise costs and challenge partnerships with service providers
- (Untitled sub-section)
•Consumers are uncertain about the monetary value of their core banking services
•Ignorance of the realities of "free banking" is driving perceptions of value for money and a reluctance to try alternatives
- The majority of consumers feel that they are getting value for money despite having no clear idea of the costs involved
•Pressure from the Independent Commission on Banking and the government will help to level the playing field for monthly fee accounts
- Transparent current account pricing will encourage the development of fee-based current accounts
- The price point for current accounts is yet to be fully defined for the consumer
APPENDIX
•Methodology
•Secondary sources
•Further reading
•Ask the analyst
•Disclaimer
FIGURES
•Figure: 96% of consumers in the UK have a personal current account
•Figure: Unauthorized overdraft fees make up a significant proportion of personal current account income
•Figure: Financial complaints have risen since the onset of the financial crisis
•Figure: Free-if-in-credit accounts are by far the most common type of account in the UK
•Figure: Value added increases as providers move towards an experience-based economy
•Figure: Value added increases as providers move towards an experience-based economy
•Figure: Most current accounts charge between GBP 10–15 per month
•Figure: The largest obstacle to packaged account uptake remains the mix of product features
•Figure: Nearly 80% of packaged accounts have travel insurance as part of the package
•Figure: Lloyds offers the greatest price flexibility for its packaged accounts
•Figure: Low-income consumers are less likely to pay a monthly fee for their current account
•Figure: Providers need to refine how they position their packaged account
•Figure: Raising positive awareness of packaged accounts is an important area of development
•Figure: FS providers could learn from how other markets industry their packages
•Figure: Nearly 19% of consumers think that packaged accounts do not offer value for money
•Figure: Banks must provide benefit reinforcement beyond the point of take over
•Figure: Opportunities for a volume-led business are plentiful, with less than half of consumers in the UK holding home insurance and only one in three in possession of an annual travel insurance policy
•Figure: Affordability is an issue of significance for a sizable consumer sector
•Figure: Most consumers feel that they get value for money from their current accounts
•Figure: The vast majority of consumers have no idea what they would consider a fair fee for basic banking services
Companies mentioned
AXA, Bank of England, BBVA, CMS Energy Corporation, Hutchison 3G UK Limited, McKinsey & Firms, Metro International S.A., Nationwide Building Society, Royal Bank of Scotland Group PLC, Shanks Group plc, The Boston Consulting Group
