Friday, 27 May 2011

Charity can be bad for Bank CIOs

It has been announced by the UK Government that from next year customers will be able to make charitable donations through ATMs. Undoubtedly one of the reasons this has been put forward is reduce the the lobbying by charities to let cheques continue beyond 2018, when they are currently scheduled to end. The charities argue that since such a large amount of their donations come via cheque the end of the cheque could be a disaster for them. The Government argue that this is an alternative.

Similar to many of the interim recommendations of the Independent Commission on Banking, this announcement, while well intended, has not been thought through as to how the practically it will actually work.

With 250,000 charities in the UK, your wait  behind the person in front of you to get your weekly £100 cash out of the ATM, could be exceedingly long as they try to find the charity that they want to make a donation to. Exactly how are they going to choose the charity? Will it be a freeform entry (imagine all the typing mistakes and money swishing around the banks unposted because the charity name is not recognised) or will it be by scrolling down a list. If time is of the essence then maybe the ATM will only allow donations to one charity for a period of time, but how will it be decided which charity and how will you as a customer know which ATM is allowing donations for the charity you want to support?

Various countries around the world have experimented with offering additional services at the ATM, to make the ATM more profitable for the bank. Examples include booking tickets for the bullring (not the one in Birmingham, England) or the Alhambra at ATMs in Spain. The challenge is that most customers do not want to spend a lot of time waiting to carry out their transaction, particularly when the ATM is outside. Most customers using ATMs want to 'cash and dash', so extending the waiting time while someone fumbles to find a charity to donate to is unlikely to result in a better customer experience or more money being donated to charitites.

So why can charities be bad for Bank CIOs?  Recently Mr Hagiwara Tadayuki, Bank IT Chief at Mizhuo Bank left his job following the ATM network at his bank crashing. The reason? All the people making charitable donations following the earthquake in Japan overwhelmed the ATM network. Of  course you could argue that only in a society such as Japan would an employee be expected to do the honourable act of resigning. After all if the same rules applied in Australia then NAB would probably be on its fourth CIO this year.

So if some of the UK banks may be a little slow next year in implementing the ability to make donations through their ATMs  you'll know why!

Thursday, 5 May 2011

PPI - A sign of the mad, bad world

The announcement that Antonio Horta-Osorio, the new CEO of Lloyds Banking Group has decided to draw a line under the sorry PPI (Payment Protection Insurance) situation, take a reserve of £3.2bn and withdraw from the BBA (British Bankers' Association) appeal against the recent judgement should be welcomed as a sensible, pragmatic move and hopefully bring a close to the mad, bad world that was operating at the time that the misselling was taking place.

When the sale of PPI was at its peak the banks and finance houses were working in a market where personal loans were being sold at a loss as competition had driven the prices down and demand for funds driven the wholesale prices up. Banks and Finance Houses were prepared to sell these loans at a loss because they were able to sell Payment Protection Insurance at such a high premium, with very little chance of a claim against them due to the convoluted terms and conditions. Staff were heavily incentivised to sell PPI because that was where the profit came from and as a result hard-selling took place.

Consumers actually got loans at lower interest rates than they should have, so a good proportion of customers (primarily those who didn't take out PPI) were getting a good deal, so it wasn't all a terrible rip off for bank customers.

Hopefully the other banks and Finance Houses will follow the lead set by Lloyds Banking Group and draw this sorry episode to a halt. (UPDATE: All the other major banks have followed suit with RBSG writing off £850m, Santander £538m, Barclays £1bn and HSBC £270m or a total just under £6bn). That doesn't mean that everyone who claims should get their money back, because there are a surprisingly large number of claims being made by people who either didn't take out PPI or worse still didin't even take out a loan. The process of weeding out the fraudulent claims and processing the valid claims will undoubtedly take some time.

What should happen now is that loans and credit cards move to being priced realistically, based on the wholesale market prices and with a reasonable risk-adjusted price. This may be a shock to customers, but at least it will represent a fair price.

The fall out from the financial crisis is that retail banking needs to change, but the changes and expectations need to be not only on the banks' side but also the consumers.

Wednesday, 4 May 2011

Why the Big 5 banks should be pushing for the end of 'free banking' (and the government shouldn't)

With the ICB (Independent Commission on Banking) looking at increasing competition in the retail banking sector, examining the market share of the big banks and overall looking for greater fairness and transparency in charging, strongly supported by the likes of Vince Cable and other politicians, increasingly it looks as if the end of 'free banking' is in sight. Of course 'free banking' doesn't really exist, rather it is a mirage in that rather than paying directly for the services provided, consumers are made to pay by low or no interest rates for money deposited in current accounts, low interest rates in deposit accounts, high mortgage rates and even higher overdraft charges. As consumers baulk at the costs charged for loans and going overdrawn and politicians continually call for fairer, transparent charges, the inevitable conclusion is a banking system where customers pay for the services they use.

Being able to charge a direct amount for the services they provide would bring some significant advantages to the big banks in the heavily regulated environment that they are increasingly operating in. When there is more focus on the market share that each of the banks has, and where more market share is seen as bad, then the banks will want to focus not on the absolute market share but the quality of the market share.

All of the big banks today have customers that they don't make any money from. These will be the types of customers that open a current account for their household money, for their book club, for their children, where the balances are low, transactions sizes are small and they have only one product. If market share is going to be restricted then these are the customers that the banks are going to want to be shot of. The problem is that in today's banking environment it is very difficult for a bank to fire customers. However if customers were made to pay directly for the services that they use then it would be far easier for the banks to adjust their charges to either makes the low balance/low transaction value customers profitable or, better still for the banks, to encourage those customers to take their business elsewhere.

With four out of the five big banks now being run by investment bankers not retail bankers, and Barclays, HSBC and Lloyds Banking Group focussed on a strategy of raising their Return on Equity (ROE) up to at least the 14-15% range, then there is clear evidence that making customers pay directly for the services they use can help achieve this. In Australia where this model has existed for many years, The 'Four Pillars' (National Australia, Commonwealth Bank, WestPac and ANZ), have in the past enjoyed ROEs of 20+%. Even with tougher regulation they are each expecting ROEs of around 16%, significantly higher than any of the UK banks.

However whilst this all sounds very attractive for the big banks, it is not great for the new entrants, who will struggle to compete with the scale advantages that will allow the big banks to make their charges attractive for the customers they want. It also raises the big question of who will provide the banking services to the customers that the big banks don't want? It has the potential to significantly increase the number of the unbanked. As the likes of Vince Cable continue their crusade against the banks and push for ever more transparency of charging for banking services, the politicians need to be wary of the consequences of getting what they wish for.