Competition: do you know what it is? – the real version!

Funnily enough, I posted that last piece “Competition: do you know what it is?”, and then realised the ambiguity of that title.

Competition: do you know what it is?

Sure we know what competition is.

Competition is when someone threatens to take your business away from you.

Competition is set by being better, faster, cheaper or louder.

Competition is created by being different to everyone else.

So how does competition work in banking?

Sure, I’ve blogged many times recently that it doesn’t.

• Why banks have no competition
• Is there any competition in UK banking?
• Competition and choice in the banking sector

But there is competition in banking.

It just exists between the banks.

But if competition exists between the banks, why do they all appear so similar to the average Joe?

For example, here are some figures from moneysupermarket.com.

Borrowing £3,000 over five years will be at an intrest rate starting wtih First Direct / HSBC at 13.9%, Alliance & Leicester / Santander at 15.9%, NatWest (RBS) offer 16.9% interest rates, the Co-operative Bank 17.9%, Yorkshire Bank / Clydesdale / National Australia 20.9% and HBOS / Lloyds 22.9%.

Interestingly, the cheapest loans here are from Zopa (9.8%) and Sainsbury Finance (12.7%), with the latter a joint venture backed by Bank of Scotland / Lloyds who charge 10.2% more for the same loan!

So there is choice.

In fact, when you look at the current / deposit accounts, there are major differences in the offers available today.

For example, some current accounts offer rewards and cashback:

• Norwich & Peterborough BS Gold Classic Current Account gives you £150 towards a holiday
• Santander Preferred Current Account gives you £100 cashback when you switch
• Halifax Reward Current Account provides £50 cashback and pays £5 each month when you pay in £1,000, whether you are in credit or overdrawn

Accounts that offer a package of benefits, such as free insurances, include:

• Royal Bank of Scotland Royalties Gold Account with up to £1,089 worth of benefits
• Lloyds TSB Premier Current Account offers up to £1,126 worth of benefits
• NatWest Advantage Gold gives up to £869 worth of benefits

You may prefer a current account that pays interest on in-credit balances, in which case:

• The Santander Preferred Current Account pays 5% up to £2,500
• Lloyds TSB Classic Account with Vantage offers 2% interest up to £2,999
• Halifax Reward Current Account pays £5 per month

What about if you regularly go overdrawn? Well, there are accounts for you too:

• Santander Preferred Current Account charges no interest on overdrafts for the first 12 months of account opening
• The Co-operative Bank Privilege Premier Current Account charges 9.9%
• The Co-operative Bank Privilege Current Account 12.9%

As can be seen there is a variety of offers out there.

Much of it is interest rate based, and much of it is looking for customer churn.

But most folks don’t churn.

As mentioned recently, Consumer Focus research found that only 7% of 2,000 adults had switched accounts in the last two years, and only 17% had considered it.

Equally, one of the things that really would be different would be for a bank to reward the current customer rather than seeking the next.

What do I mean?

The leaking bucket syndrome.

Leaking buckets are where banks – or any business – focus upon getting new customers by competing at the front-end whilst losing customers at the back end.

I always remember having this discussion with one of the banks already mentioned above.

They were getting 100’s of applications every week from new customers looking to join the bank.

The marketing department did a great job.

However, they were losing EIGHT PERCENT of their customers every year due to complaints, poor service, inaccurate account management, bad advice etc.

I urged them that their real problem was focusing upon filling their leaking bucket with new business to make up for the hole in the bottom of the bucket where they lost good business they already had.

It’s the old dialogue about getting a new customer costs a lot more than keeping one.

So the focus of a bank should shift you would think to rewarding their loyal customers who don’t bother switching, rather than encouraging people to switch.

But that’s not a strategy many banks follow because they know folks don’t bother switching.

Finally, a wee point on the above.

During the meeting, the Head of Marketing got into a ding-dong battle with the Head of Risk.

What was the problem?

The Head of Marketing said that they were doing a great job getting in floods of new applications wanting to open business with the bank but the Head of Risk kept rejecting them.

Over HALF of the applications received by the bank were thrown out as poor credit risk.

The Head of Risk said that the Head of Marketing was targeting the wrong audience and bringing in dross.

It was almost a punch-up, but makes you realise that

1. There is competition in banking, between banks;
2. Bank competition is typically based upon interest rates and bells and whistles to encourage new accounts, rather than rewarding the existing accountholder; and
3. Even when banks can get new applicants, the risks involved can often be greater than the business grown.

The last point is one that First Direct drilled into me when I interviewed them:

Chris Skinner:

Why aren’t you the biggest bank in Britain?

Paul Say, Chief Marketing Officer, First Direct:

I can best answer that by saying that, when we started out, we really played to a part of the community who were completely disenfranchised by their banking experience. So therefore, we grew very quickly, because a lot of people decided “I’m going to switch, and it’s worth going through the pain of switching”. We continue to occupy that place in the marketplace, the switchers. In fact our target market is affluent, professional people, which is a very niche marketplace of the total switcher market. So we’re not growing by ten market share percentage points every year. What you find is that we deliver small organic growth, but when we bring people in we build the relationship and deepen the relationship with them. Therefore, we grow their product holdings, and that is our real focus. Rather than just acquiring new customers for one single product, we would rather acquire one customer for many products. The result is that we have a group of very profitable customers banking with us, who have extremely high levels of satisfaction and therefore recommendation of our services to their peers.

It is also a point that HBOS, Northern Rock and many others forgot when they started pimping mortgages to anyone who would take one.

It is worth remembering that not every customer is one you want, and competition should be based upon a sound long-term strategy, not just bucking the system for a quick buck.