Competition and choice in the banking sector

On Tuesday last week the House of Commons Treasury Committee took evidence from

• Eric Daniels, Group Chief Executive, and Helen Weir CBE, Group Executive Director, Retail, Lloyds Banking Group
• Stephen Hester, Group Chief Executive, Royal Bank of Scotland Group
• Benny Higgins, Chief Executive, Tesco Bank

It makes for interesting viewing, although long - you can watch the whole Committee meeting by clicking here.

Andrew Tyrie, the Head of the Committee, will be our keynote address at the Financial Services Club tomorrow night, our final meeting of 2010.

And, if you don’t have a few hours free to watch the Committee meeting, here’s a summary of what transpired from the Scotland Herald:

Lloyds Banking Group chief executive Eric Daniels warned that breaking up banks would not improve competition as he highlighted the importance of the Bank of Scotland brand north of the Border.

Meanwhile, his retail banking chief Helen Weir was lambasted by MPs for admitting she does not know how much her current account costs her, although she said the typical customer pays the equivalent of a cup of coffee a week in charges and foregone interest.

Mr Daniels told the Treasury committee that Lloyds, which is 41%-owned by the taxpayer, had not offered to sell Bank of Scotland when it negotiated with European competition officials last year.

He said: “What we presented to them were a variety of alternatives.”

Asked if selling Bank of Scotland, which it acquired with the rescue takeover of HBOS, was one of them, he said: “I do not believe that this was an alternative considered.”

He added: “The Bank of Scotland is a very powerful brand in Scotland. It is a 300-year-old name and identification with it is very strong.”

He noted it had “more resonance” with customers than Lloyds TSB Scotland, which it has agreed to sell.

The Independent Commission on Banking is looking at competition and could recommend the break-up of Lloyds, which has roughly 30% of UK mortgages and current accounts.

The market north of the Border is particularly dominated by Lloyds and Royal Bank of Scotland.

Mr Daniels said: “This is an immensely competitive market. I am not sure dividing banks up further will give a more competitive outcome.”

Stephen Hester, chief executive of Royal Bank of Scotland, said: “We believe we can compete successfully in the market, as we see it, for all its warts.”

Asked if the combined Lloyds TSB-HBOS is a “wart”, Mr Hester said: “I do not think it is right to be drawn on that.”

He, too, played down the importance of new entrants.

“There is not a queue of people trying to enter the UK market.”

He added: “I do not see evidence that a high street you can walk down with 10 banks has particularly greater competition than one with five.”

He cited the example of the supermarket sector dominated by four players.

Helen Weir, Lloyds’s group executive director of retail, said the typical current account in credit is losing £35 a year in “interest foregone” – the difference between what the customer received and Bank of England base rates. Lloyds also charges interest and fees on overdrafts.

She said that, in all, a customer pays the equivalent of a cup of coffee a week for an account, around £100 a year.

Ms Weir said banks face costs including branch networks and cash machines.

She said: “I think most customers would have a good idea what they pay for their current account.”

But she admitted she did not know what she paid for hers.

Treasury committee chairman Andrew Tyrie said: “The idea that customers have a pretty good idea how much they are paying for their current accounts will be met with a loss of credulity among many of them since the group executive director herself did not know how much she paid.”

Benny Higgins, chief executive of Tesco Bank, which plans to launch mortgages and current accounts, described free banking as a “myth”. He criticised the difficulty of switching between banks and opaque charging.

“It is an unequivocal conclusion that the market is not competitive,” he said.

Mr Higgins accused big banks of sharing customer information it denies to others. This was refuted by Lloyds and RBS.

Mr Hester said he expected the Government’s 83% stake in RBS to be sold in tranches.

He said: “I think it would be a symbol of Britain’s recovery. It would be a symbol of Royal Bank of Scotland’s recovery.”

He said he had not requested a copy of last week’s report by the Financial Services Authority into RBS’s near-collapse in 2008.

Overall, the evidence was very interesting in the light of the review of competition and choice in the banking sector.

Set against Sir Don Cruikshank's evidence the previous week it focuses nicely on the key areas of both sides of the argument and asks questions about why there has been no significant change to competition in the sector in the ten years since the Cruikshank report.