Willingness to Pay for UK Current Accounts

Creating more direct revenue streams from current accounts will be vital to banks, especially given the onus on cost control in 2012. This report looks at how banks should monetize the current account relationship through encouraging the adoption of fee-based packaged accounts

Features and benefits

• Achieve revenue growth through understanding the obstacles constraining packaged account sales
• Overcome the criticisms of packaged accounts through recognising and mitigating the risks of miss-selling
• Foster long term relationships with customers through learning about the value of benefit reinforcement
• Build a market leading strategy through appreciating the importance of customization

Highlights

The packaged account is already earning a significant amount of revenue for the UK retail banking market but with growth in both the total size of the market and the monthly fee per account, the opportunities are impressive

The construction of the package on offer is the single biggest limitation on the size of the market for packaged accounts. This is the clear message that emerges from the customer responses to Datamonitor's 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 segment, most providers have instead relied on a price point scale alongside a roughshod premiumization of the product.

Your key questions answered

• What are the obstacles limiting the potential of the packaged account market?
• 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?

Table Of Contents

OVERVIEW
Catalyst
Summary
Methodology

INTRODUCTION
A profitable retail banking business is becoming even more important to large banking groups
Banking chiefs will look to their retail divisions for attractive investment opportunities
Economic and regulatory conditions place deposit gathering front and center for retail banks
Current accounts provide a significant source of income for UK retail 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 industry 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 market for packaged accounts is nearly 10 million consumers strong and is growing
The packaged account market is now worth nearly £1.5bn per year and is yet to reach its full potential
The market 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 marketing message is off target
Providers need to develop packages that suit the lifestyles of their target customer segments
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 segments
The mobile phone industry 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 market due to duplication and irrelevance
BBVA Compass’s Build-to-Order checking account allows for personalization
A new entrant could disrupt the market 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 market
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 market
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

List Of 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 £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 industries market 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 acquisition
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 segment
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