Retail Banking

Banking and Branding

October 2007

For more information please contact:

Clare Staunton
The Future Foundation
Cardinal Place, 6th Floor
80 Victoria Street, London, SW1E 5JL

T: 020 3042 4747

E: clares@futurefoundation.net
W: www.futurefoundation.net
Contents

Executive summary................................................................................................................ 3
1. The Macro environment for banks: Competition, Mergers and Regulation ................................ 4
2. Consumer interest in financial services.............................................................................. 6
3. Drivers of consumer loyalty towards banks ......................................................................... 7
4. Trust in financial institutions – Brand suspicion ................................................................. 9
5. Banking payment issues .................................................................................................10
5.1. Bank charges……..……………………………………………………………………………….10
Further contents of this report………………………………………………………………………...12

Charts

“I regularly read about financial services in newspapers, magazines or on the internet”……………. 6

Motivations for loyalty to banks .............................................................................................. 7
“You can’t trust any financial services company to give you honest advice”................................... 9
“Bank charges are justified by the service provided” Base: 1,205 aged 16+, 2006 ………………… 10

Pictures

The macro environment for banks: competition, merger activity and regulatory intervention ........... 4

2
Executive summary

British retail banking continues to be an industry making seriously successful gains, with record-
setting profits being reached year on year and a growing brand presence on the high street and
internet.

However, in an era of unprecedented competition and proliferating choice within the industry,
successful operators must remain in tune with customers’ banking needs and their expectations of
the sector. This report will focus on the main developments within UK retail banking and their
significance for the UK consumer, highlighting the need to track consumers’ attitudes to finance, the
changing nature of consumer loyalty, the evolving role of bank branches, issues surrounding fee-
paying bank accounts and bank charges, the growth in the number of bank-customer communications
channels… as well as the importance of providing an ethical dimension to the consumption
experience.

3
1. The Macro environment for banks: Competition, Mergers and
Regulation

Picture 1 The macro environment for banks: competition, merger

activity and regulatory intervention

Source: nVision Base: UK, 2007

Mass-market UK retail banking remains a highly competitive sector and is regarded as one of the
most competitive in the whole of the financial services industry. In large part, this can be attributed
to what the BBA (British Banking Association) regards as UK bank customers’ recognition of a “good
deal when they see it”. We will explore UK consumers’ bonds with their banks and reveal a somewhat
dysfunctional relationship, with bank loyalty grounded primarily in practical and non-emotional
reasons, which highlights the need for banks to remain competitive in the presence of a potentially
migratory consumer base.

As for the current evolution of the UK’s retail banking sector, the decade thus far has seen
significant merger activity. Lloyds took over ownership of TSB, Royal Bank of Scotland took over
Natwest, Barclays took the Woolwich, Halifax merged with the HBOS group and Abbey joined the
Banco Santander group. And though merger activity has slowed somewhat, speculation surrounding
further bank rationalisations persist.

Regulatory pressures continue to play an important role in UK retail banking operations and the mid-
decade saw significant attention falling on the sector. Regulatory pressures – primarily yet by no
means exclusively from the Office of Fair Trading (OFT), the Competition Commission, The Treasury,
the Financial Services Authority (FSA) as well as European directives – all have the aim of adjusting

4
unfair practices, regulating financial processes and increasing the transparency of retail banking
products and services for customers.

One regulation issue featuring heavily in the UK media and especially pertinent in the minds of UK
consumers and regulators alike remains the issue of default bank charges and fees levied on
consumers who encroach overdraft limits. Regulatory intervention and consumer attitudes towards
such charges along with transparency in banking practices in general will be covered later in this
analysis.

5
2. Consumer interest in financial services

Chart 1 “I regularly read about financial services in newspapers,

magazines or on the internet”

Proportion who agree or strongly agree, by gender, age and social grade

50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
AB

C2
+
l

4
le
Al

65
-3

-5
Ma

25

45

Source: nVision Research Base: 1,230 adults 16+, UK, 2006

A little over a third of British consumers agree that they keep abreast of developments in financial
services via newspapers, magazines or the internet. Consumers in the more elderly generations
appear more interested in keeping a tab on the financial services industry as well as those within
ABC1 social grades.

With the growth of online information sources and a heightened media interest in financial services
in general, the retail-banking sector has been placed under a sometimes harsh spotlight of public
inquiry. A growing number of consumers, within a few mouse clicks, can have access to goldmines of
information on retail banking; products, services, consumer reviews…all are available and very much
under the public gaze. This can be viewed as both a threat and opportunity for British retail banking
operations; banks must accept that negative press has the potential to make its way to the consumer
across an ever-expanding web of communications channels.

However, through exploiting the very same channels that consumers now populate so heavily, there
is an enormous potential for banking operations to both pinpoint suitable customers and engage
with them to positive effect across mediums they at once understand and trust.

6
3. Drivers of consumer loyalty towards banks

Chart 2 Motivations for loyalty to banks

Motivations for loyalty to banks nVision Research

The atmosphere is better than elsewhere Practical reasons

I have a liking/ emotional attachment to the
Emotional reasons
company
I expect to find customers I know/ like

Their products are better value than others

Their products are better quality than others

I don't have much choice

I expect to find staff I like there

It is convenient to get to

It is familiar/habit

0% 10% 20% 30% 40% 50%

Source: nVision Research Base: 859 adults 16+ who said there was a particular bank
they often return to, UK, 2003

When analysing consumers’ loyalty towards their banks, nVision research shows us that a significant
majority of British consumers – nearly 85% – remain loyal to one single bank (though this figure
drops to around 60% when applied to the 15-29 age cohort). Further research suggests that half of
all consumers have never changed their bank account in living memory. The notion that consumer
loyalty is an outmoded concept is far from true; a report by telecommunications company O2 found
that over three-quarters of consumers agree that ‘loyalty is as relevant today as it has ever been’.

To assume, however, that loyalty has not evolved since the post-war ‘pre-consumer’ age would be to
miss the point. The era of social deference and a given assumption of trust has well and truly passed;
the consumer who once ‘knew their place’ has evolved – with the help of a critical media – into an
autonomous actor whose levels of distrust and cynicism have grown with the years. Nearly two-thirds
of UK consumers agree with the statement ‘the longer you remain loyal to a company the more they
tend to take you for granted’ (Source: O2 UK); there is a sentiment abroad that being a loyal
customer is both bad for your back pocket and your status as a consumer.

What then drives (the considerable) consumer loyalty enjoyed by the UK’s banking institutions
today? As one would expect, the prime motivations – as indicated above – are not based on the
quality or even price of the products and services available; loyalty is still fuelled by convenience and

7
familiarity factors, with emotional commitments rare. This is as much inertia as it is objective,
measurable loyalty.

As outlined in the nVision trend ‘Demanding Consumers’, it would be unwise though to rely on
convenience and familiarity factors alone into the future. Nearly two-thirds of consumers now feel
the need to better evaluate the products they buy, compared with less than half in 1983. Increasing
ease of supplier scrutiny as well as a future containing possible bank account charges – to be
discussed later – means that consumers will likely take a keener interest in the financial institutions
they use. We will also witness renewed efforts within the financial services industry to invigorate
consumer loyalty through adopting more sophisticated branding techniques. (See related nVision
report, ‘Branding Financial Services’).

8
4. Trust in financial institutions – Brand suspicion

Chart 3 “You can’t trust any financial services company to give you
honest advice”

Proportion who agree/strongly agree, by age, gender and social grade

50%
Agree
45%
Agree strongly
40%

35%

30%

25%

20%

15%

10%

5%

0%
45-54

55-64

AB
25-34

35-44

65+
All

Male

DE
16-24

C1

C2
Female

Source: nVision Research Base: 1000 adults 16+, UK, 2004

Traditional consumer loyalty has given way to an environment of growing distrust and cynicism that
the retail banking industry would do well to absorb and manage. With around 45% of UK adults now
agreeing that ‘you cannot trust large multinational companies nowadays’, even the most established
of brands are open to criticism and suspicion of a kind usually directed towards embattled
politicians, estate agents, used car dealers.

We see in the chart above a sizeable proportion of consumers applying a critical eye to the financial
institutions to which they - so far - typically remain loyal over their lifetimes. Nearly a third of
British consumers agree that ‘you can’t trust any financial services company to give you honest
advice’; agreement with the statement rises within the more elderly age groups and higher social
grades.

An important development, consumers are nowadays being actively supported in their desire to
quietly (and not so quietly) vent their frustration at bad treatment and perceived injustices within
financial transactions. They have been invited by a plethora of actors – via the internet, the media
and flourishing consumer interest groups – to rebel, to complain either about “unfair” bank charges
(as we will discuss in the following chapter) or to deplore high bank profits or to defect from one
bank brand into the arms of another or to avoid the traditional banking system entirely (as discussed
in the ‘Social Lending’ chapter later).

9
5. Banking payment issues

5.1. Bank charges

Chart 4 Source: “Bank charges are justified by the service provided”

Base: 1,205 aged 16+, 2006

Source: “Bank charges are justified by the service provided” Base: 1,205
aged 16+, 2006

30% Agree Agree Strongly

25%

20%

15%

10%

5%

0%
45-54

AB
25-34

65+
Total

Male

C2

Source: nVision Research Base: 1,205 aged 16+, 2006

According to a survey by financial comparison website MoneySupermarket, British bank customers

face, on average, more than 100 potential fees, charges and penalties from their banks and credit
card companies (surplus to any account/product start-up/maintenance costs). The Office for Fair
Trading, which has already halved and capped the default fees and charges on credit cards at £12, is
due to rule whether fees on unauthorised overdrafts and other faults (such as bounced cheques)
should be regulated more heavily, forcing banks to either cap or abolish charges.

To introduce such regulation would seriously dent the revenues of British retail banking outfits.
According to figures from the consumer watchdog Which?, banks made a total profit of £4.7bn in
2006 from the fees and interest rates on their customers’ unauthorised overdraft excesses.

What do the UK’s consumers think about bank charges? Using nVision’s Changing Lives research, we
see that a very small proportion of UK consumers – less than one in five – agree that “bank charges
are justified by the service provided”. Furthermore, increasing numbers of British bank customers
who have incurred charges as a result of either edging over their overdraft limit or other account

10
infringements, have taken it upon themselves – with the help of consumer advice groups – to reclaim
the charges, as discussed in the following slide.

Related nVision research has found that close to half of British consumers regard bank charges as an
extra strain on household budgets. Agreement amongst C2DE consumers rises to nearly 60%, a figure
banks would do well to confront with a strategy. In a new era of potentially volatile consumer loyalty
and a rising sentiment of distrust, the banking industry must tread cautiously to avoid being viewed
as an essentially manipulative industry whose interests do not coincide with its customers.

11
Further contents of this report

• Banks under pressure to refund charges

• Fee-charging bank accounts – the end of ‘free’ banking?

• Channel issues - How to interact with customers?

• Self-service and retail banking

• Internet banking

• Concerns over Internet security

• Social lending: An extension to online banking

• Ethical banking?

This is an extract from the ‘Retail Banking’ report produced by nVision’s UK service. To view the full
report or to discuss the service please contact Clare Staunton on 020 3042 4747 or
clares@futurefoundation.net

In May 2005 the Future Foundation became part of Experian joining its Business Strategies Division.

12