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RFi Group Insight

Growing expectations around interest rates offered on current accounts

03

Current Accounts

First Direct voted the most trusted provider in Britain

05

Savings

BoE cuts the amount of savings protected

06

Mortgages

UK Government pledges to make lending more transparent

07

Cards

Households at risk of debt crisis warns Moody

08

Personal Loans

P2P lending continues to go from strength to strength

09

IN THIS ISSUE – August 2015

Did a colleague forward you the

UK Retail Banker?

(2)

Letter from the Editor

Welcome to the August edition of the UK Retail Banker, a

newsletter designed to give you an update on news and

trends within the UK retail banking market.

In this month’s insight piece we discuss the increasing

importance of interest rates in current account choice and that

in light of the Bank of England (BoE) announcing it has been

forced to reduce the amount of personal savings protected by

£10,000 to bring Britain in line with the rest of the European

Union and savings rates being at record lows, demand from

current account holders for competitive interest rates may

only intensify, presenting a lucrative opportunity for banks

who are able to meet this demand.

Further regulatory changes will be implemented in the

mortgage market after the Economic Secretary to the

Treasury, government ministers and representatives from the

mortgage industry pledged they would work together to make

home lending in the UK more transparent.

Worrying news has affected the credit card space, with credit

ratings agency Moody warning that UK households are at

great risk of a personal debt crisis as more and more choose

to switch credit cards at the expense of paying off balances.

More and more consumers are also turning to peer-to-peer

(P2P) lending options with more than £500 million in P2P

loans having been borrowed as new lending across the UK in

the second quarter of 2015.

I hope you enjoy the issue.

Victoria Bateman

Director – EMEA

RFi Group

vbateman@rfintelligence.com

(3)

RFi Group Insight

Growing expectations around interest rates offered on current accounts

The current account market was shaken up by the introduction of the Current Account Switch Service (CASS) in September 2013. In the months prior to the official launch of the CASS, there was an influx of new offers and accounts across the market specifically designed to lure switchers. Some offers included cash incentives to switch with Halifax introducing a one-off incentive of £125 to customers who switched to its reward account and a monthly payment of £5 if certain conditions were met. Other providers adopted the approach of increasing rates on in-credit balances with Nationwide offering an interest rate of 5% on balances of up to £2,500 on its FlexDirect account, while Santander’s 123 current account came with a cashback and a 3% interest rate on balances between £3,000 and £20,000.

These new offers certainly had the desired affect with the Payments Council reporting that within the first 12 months that CASS had been in place there was a 22% increase in annual switching volumes to 1.2 million accounts switched.

However, one unforeseen effect of the heightened number of enticing offers and deals has been an increase in customers’ expectations and demand around interest rates on current accounts, with RFi Group data showing that during the first 12 months of the implementation of CASS interest rates were the most important factor in current account choice overall.

Intensifying the issue is the fact that savings rates are at record lows with Bank of England figures showing that the average rate offered on easy-access accounts by financial institutions in Britain halved in the past two years. As a result, Brits are searching for alternative ways to achieve better returns and many of them are turning to current accounts. Moneysupermarket reported that as many as 48% of savers are now storing their money in current accounts for better returns.

RFi Group data shows that the competitiveness of interest rates on offer has become a stronger factor in driving choice of current account decisions; with 1 in 5 current accounts now chosen for the interest rate. Further RFi Group data shows providers offering rewards are clearly winning the switching battle, with Halifax, Santander and Nationwide leading the net switching ranking among customers who switched their current account in the past 12 months. Those results are in line with industry data released by Payments UK (formerly the Payments Council), which has these three providers as the largest net beneficiaries of the Current Account Switch Service.

The main rationale behind the Current Account Switch Service was to boost the competition in the market by encouraging consumers to shop around. However, not only has it encouraged consumers to look elsewhere, it has also encouraged them to be more demanding in what they expect from a current account. Now with the Bank of England (BoE)

RFi Group data shows that

the competitiveness of

interest rates on offer has

become a stronger factor in

driving choice of current

account decisions; with 1 in 5

current accounts now chosen

for the interest rate. Further

RFi Group data shows

providers offering rewards

are clearly winning the

switching battle, with Halifax,

Santander and Nationwide

leading the net switching

ranking among customers

who switched their current

account in the past 12

months.

(4)

When it comes to

frequently utilised channels

of interaction, online

banking is by far the

dominant channel, with

84% suggesting they used

the channel at least once a

month, while only 44%

used branches frequently.

Source: RFi Group

Current account news

First Direct voted the most trusted provider in Britain

30,000 consumers took part in the annual survey conducted by Moneywise. First Direct won the crown for Most Trusted provider for the second year in a row, ahead of Coventry Building Society. This is the fifth time the subsidiary of HSBC claimed the overall Most Trusted award, in the seven years the awards have been running, with a large number of respondents impressed with the bank's customer service. Santander has been named as Most Trusted mainstream bank. This success reaffirms the progress the bank has made since absorbing Abbey National, Bradford & Bingley and Alliance & Leicester five years ago and shows that the bank's emphasis on improving customer service has paid dividends. Another component of the bank's success was undoubtedly its strong product proposition, with many respondents openly praising the competitiveness of its offering.

Current accounts become the main financial target for fraudsters The product has eclipsed mortgage applications in this infamous ranking. According to Experian, a credit rating firm, nearly half of fraudulent current account applications were attempted by fraudsters who had stolen an ID, a 17% increase compared with the last year. Many criminals shifted to targeting current accounts to take advantage of faster current account switching rules. They consider bank accounts as a perfect gateway into the bank, hoping that once they are able to set it up, they would be able to take out other products, such as a credit card or loan. In the 12 months to March 2014 1,136,251 consumers switched their current account, a number which represents a 7% increase on the previous year.

Britons remain keen on branch banking

According to a TSB survey, more than 3 in 4 people believe it is important that their bank offers both online and branch services. In recent years many mainstream banks have rolled back their branch networks, investing instead in digital capabilities, however, the figures released by the bank confirm the continued importance of traditional branches.

RFi Group data shows that the branch is the second most used channel, after only ATMs, with over 9 in 10 retail banking customers declaring to have used the channel in the past 12 months, which is roughly the same proportion that used online banking via a desktop or laptop computer. However, when it comes to frequently utilised channels of interaction, online banking is by far the dominant channel, with 84% suggesting they used the channel at least once a month, while only 44% used branches frequently during a month.

TSB believes that its survey results vindicate its current channel strategy. While many of its competitors moved to close their branches, the bank came out in defence of the branch network in early 2015 when it announced plans to upgrade 265 of its existing branches and open an additional 30 in new locations.

Thinking about conducting day to day

banking with your main financial

institution, please indicate which of the

below you use to conduct your banking

activities and how often in a typical month

96%

92%

91%

64%

50%

49%

40%

Using an ATM Visiting a branch Using internet banking via

a desktop or laptop computer Banking via the phone speaking with a real person

Online banking via your mobile devices Banking via an app on your

mobile devices Banking via the phone speaking to an automated

voice service

(5)

RFi Group’s UKSC data

shows that in the past 12

months inflation had a

significant impact on the

personal financial situation

of 1 in 3 savers

Source: RFi Group

Savings news

Inflation ate £80bn of savings in the past 5 years

Henderson Global Investors reported that consumers with cash savings have lost £80bn since 2010 as returns did not keep up with rising inflation.

£729bn, a half of the UK's wealth, is kept in cash savings accounts, with over a half of this sum held in easy access accounts, which offer the lowest returns. The average interest rate offered on cash savings products currently stands at 0.97%, a level that has remained largely flat since 2009. However, inflation as measured by the Retail Prices Index between 2010 and 2013 was 19.8%.

According to Henderson Global Investors calculations, these figures suggest that while £36bn in interest payments was earned in cash savings accounts in the past 5 years, inflation eroded £116bn of their initial value, leaving savers £80bn worse off in real terms.

RFi Group’s UKSC data shows that in the past 12 months inflation had a significant impact on the personal financial situation of 1 in 3 savers

BoE cuts the amount of savings protected

The Bank of England (BoE) announced it has been forced to reduce the amount of personal savings protected by £10,000, to bring Britain in line with the rest of the European Union.

The current amount of protection will be maintained until the end of 2015. This guarantee protects savers' if their bank collapses, however, the fall in the value of euro over the past 5 years, has forced the BoE to lower the amount from £85,000 down to £75,000. Currently about 3% of Britons have savings exceeding the £85,000 limit.

This move brings Britain in line with other EU members that set the cover limit at €100,000. Britain's old limit was implemented in 2010 and it is up for renewal every five years.

However, the reduction has caused controversy with Andrew Tyrie, the Chair of the Treasury select committee, saying that it is absurd that the decrease in the euro's value had an impact on the cover provided to UK savers.

Consumers withdraw £1.8bn in three months since pension freedoms were introduced

According to pension figures released by the Association of British Insurers, over 55s have withdrawn £1.8bn from their retirement pots since the new pension freedoms were introduced on April 6.

The data provided by the trade body which represents most of the UK's pension companies shows that the numbers exceeded the Treasury's estimates by £500m.

The data also suggests that for the first time, retirees are putting more funds into flexible pensions compared to what they spend on annuities. The new pension rules were designed to prevent people from being forced into buying annuities. While those products provide a source of steady income for life, they usually offer poor value.

Over the last 12 months what impact have the following issues had on you

personally? % who said strong impact

35% 33% 29% 28% 24% 18% The performance of the

UK economy Inflation Changes in interest

rates The performance of the

global economy Unemployment Instability in the banking

(6)

Results from the Bank of

England’s recent Credit

Conditions Survey show

that lenders across the UK

experienced a surge in

lending demand in the

second quarter of the year

Source: Bank of England Credit Conditions Survey 2015 Q2

Mortgage news

UK Government pledges to make lending more transparent

Following a meeting between the Economic Secretary to the Treasury, government ministers and representatives from the mortgage industry, home lending in the UK is to become much more transparent, with all three parties pledging to work together to achieve this. The meeting also facilitated discussion around steps taken to help first time buyers enter the market, including the Help to Buy scheme and ISAs.

Paul Smee, director general of the Council of Mortgage Lenders (CML), stated that the CML “hope the improvements we are making to the transparency of fees and charges will help make it easier for people to understand mortgage costs more easily, and will support the many benefits that a wide choice of mortgages brings to consumers”.

CML plans to improve quality of advice

The Council of Mortgage Lenders (CML), along with its members, who account for 90% of home lending across the UK, is planning to improve the quality of advice given to borrowers.

This plan follows a Financial Conduct Authority (FCA) investigation revealing that the quality of advice given to borrowers is mixed, with some discussions leading to suitable recommendations and products, while other borrowers have encountered insufficient recommendations due to advisors failing to completely understand borrower needs. The report also suggested that firms and advisors need to be more careful when it comes to solely relying on completing point-of-sale application systems, and that perhaps advisors need to use their own judgement in some cases. Firms that could find a healthy balance between the two were deemed to be the best performing.

Another finding was that customers are often concerned that they may give an “incorrect” answer to a question during completing their point of sale application systems, which may lead to customers giving misleading answers.

Paul Smee, Director General of CML, stated that CML “will be working with the FCA and with our members later this summer to help identify good practice in delivering advice to consumers. The industry recognises the importance of good experiences for customers, and more than a year on from MMR implementation it is a good time to take stock and review.”

AA Financial Services and Bank of Ireland to launch mortgages in 2016

AA Financial Services, a division of roadside recovery organisation AA, has signed a deal with Bank of Ireland UK to launch various financial service products, include a new mortgage product in the second quarter of 2016. The finer details of the loan terms have yet to be revealed. Kathryn Thomas, managing director of AA Financial Service, stated that the deal offers scope for the AA to expand into new financial services arenas such as mortgages, and that “the new partnership creates a stable new platform within a diverse and fragmented market place that will allow the AA to compete with a long-term, strategic UK banking proposition.”

Bank of England results reveal strong increase in mortgage demand

Results from the Bank of England’s recent Credit Conditions Survey show that lenders across the UK experienced a surge in lending demand in the second quarter of the year; in the previous three quarters demand had decreased. This growth in demand was in fact the strongest seen since the end of 2013, with lenders expecting the high demand to continue.

-60 -50 -40 -30 -20 -10 0 10 20 30 40 50 Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15

How has demand for secured lending for house purchase from households

changed? Net percentage balance

(7)

Figures from the UK Cards

Association reveal that in

April monthly credit and debit

card spending increased

0.9% to reach £50.7 billion.

This was the second

consecutive month of card

expenditure increasing

beyond £50 billion

Total spending £billions Annual growth rate for spending Apr 2015 Apr 2014 Apr 2015 Apr 2014 All cards 50.7 47.2 7.1% 8.0% Debit cards 36.1 33.2 8.0% 8.7% Credit cards 14.6 14.1 5.0% 6.3%

Source: The UK Cards Association

Cards news

Households at risk of debt crisis warns Moody

Credit ratings agency Moody has warned that UK households are at great risk of a personal debt crisis as more and more choose to switch credit cards at the expense of paying off balances.

Adding to the problem is the fact that consumer spending is now higher than before the credit crunch and growth in unsecured consumer debt is outstripping wage growth. According to Greg O’Reilly, an analyst at Moody’s, "low interest rates are hiding the risk to consumers, making consumer debt appear more affordable on the surface, but masking potentially negative long-term consequences."

Challenger banks are also using enticing deals with long balance transfer deals to pull customers away from the Big Four, with Moody’s finding that at the beginning of 2013 the best transfer offers provided interest free periods of up to 2 years, but now the best offers have interest free periods of up to 3 years. However, customers are using this time to spend more money rather than pay down their debt, leading to increasing interest accrual and resulting in greater difficulty for customers to pay off their debt.

Consumers use credit to pay for travel

Research conducted by point-of-sales credit provider Pay4Later has revealed that 14 million adults who have been on or booked holidays in the 12 months to July 2015 put a proportion of the costs, or in many cases, the entire cost on credit. This means that £16.1 billion was spent on credit for holiday spending. 11% of these adults expect it will take them a year or more to pay off the debt, while most expect to clear the debt within the space of four months.

Pay4Later is planning to launch a service for travel companies due to increased demand from travel companies wanting to be able to offer credit to its customers.

Card spend continues to grow

Figures from the UK Cards Association reveal that in April monthly credit and debit card spending increased 0.9% to reach £50.7 billion. This was the second consecutive month of card expenditure stretching beyond £50 billion.

Cards were used almost 25,000 times a minute across the UK according to the data, with debit card spending accounting for 76.6% of all card transactions and continuing to outpace credit card spending. With the Easter holidays taking place in April, large increases in spending at places of recreation were seen, with spending at amusement parks rising by 104%, aquariums and zoos rising by 76% and tourist attractions by 40%.

Just over 1 in 10 transactions were conducted online, with 121 million purchases made on the internet throughout April; 28% of transactions conducted online were for entertainment purposes. The average value of face-to-face transactions was £41.64, almost half of the average value of online transactions (£95.22).

Richard Koch, Head of Policy at The UK Cards Association, stated that "with the highest employment rate since 1971, strong consumer confidence and driven by debit cards in particular, we’re seeing card

(8)

More than £500 million in

peer-to-peer (P2P) loans was

borrowed as new lending

across the UK in the second

quarter of 2015.

Aggregate P2PFA member data

Q1 2015 Q2 2015

Cumulative

lending 2,643.8 million 3,150.6 million

New

lending million 459.2 million 507.3

Source: Peer2Peer Finance Association

Personal loan news

Rates at historical lows

According to data from the Bank of England (BoE), interest rates on personal loans are now at historical lows since records began in 1995, with a loan of £10,000 having an average of just over 4%.

According to the latest results of the BoE’s credit conditions survey, unsecured consumer credit flows (excluding student loans) increased in the three months to May 2015, with monthly flows remaining higher for unsecured lending than for credit cards. Increased consumer confidence and low personal loan rates are thought to have driven this increase. The Bank of England also mentioned that the low rates reflect intense competition among lenders. In terms of annualised rates, the three month growth rate for unsecured lending increased in May to a level not observed since 2005.

P2P lending continues to go from strength to strength

More than £500 million in peer-to-peer (P2P) loans was borrowed as new lending across the UK in the second quarter of 2015.

The results, released by Peer2Peer Finance Association, show that the value of P2P lending is now at a historical high. Christine Farnish, chair of the Peer2Peer Finance Association stated that, “We have passed yet another milestone with our members facilitating over half a billion pounds of new loans in the last three months – at this rate we may hit £4bn by the New Year. Strong growth continues across all parts of the market, reflecting the increasing trust that both lending consumers and borrowers have in peer-to-peer platforms.”

A more in-depth look at the results reveal that consumer P2P net lending, taking into consideration account loans that have been repaid during the quarter, stood at just over £120 million, while £67 million was lent to small businesses and £48 million against property. Across the UK P2P market, there are 116,000 lenders and 189,000 borrowers. Industry experts believe that the P2P sector will continue to grow, particularly with the most recent budget announcing a new tax free ISA specifically catering to investors in the P2P lending market that is set to be released in April 2016.

Loan sharks believe to be taking advantage of price caps

According to data from the Consumer Finance Association (CFA), short-term lending reduced by 68% in the past two years due to the Financial Conduct Authority (FCA) implementing a cap on the cost of payday loans - 0.8% a day of the amount borrowed-at the beginning of the year.

Results show that 80% of loan applications have been rejected and 4% of those who were rejected borrowed from illegal lenders instead. Furthermore, the number of firms offering short-term loans across the UK dropped from 240 in 2013 to approximately 40 in 2015. The CFA has highlighted that loan supply is being “severely restricted” and only those with good credit records are being granted loans. The report suggests that despite the shortage in loan supply, “consumers still require access to small sum short-term loans to manage their finances effectively,” and as such are being tempted by loan sharks.

However, Citizens Advice has a different stance on the matter, stating that they have seen a 45% drop in the number of complaints received in the past year, and stands by the “strong stance against irresponsible lending.”

(9)

RFi Group research

suggests that 30% of retail

banking customers who

are extremely eager to use

Apple Pay in the first 12

months of it being

available in the UK would

switch to a credit or debit

card that could use Apple

Pay, should their current

provider not provide the

service

Source: RFi Group

If the Apple Pay wallet for the UK does not allow you to use the credit or debit card you use most often, please indicate

which of the below you would be most likely to do?

(Those who stated they would be likely to use Apple Pay in the first 12 months

of its launch) I would switch to a credit or debit card that is able to be included in the Apple Pay wallet, even if that means switching to a different bank's card

30%

I wouldn't use Apple Pay and would use my bank's mobile wallet with my most-used credit or debit card instead

27%

I wouldn't use Apple Pay and would pay as normal using my physical card or cash

43%

Payments and Digital News

Customers voice frustrations after being unable to use ApplePay

RFi Group research suggests that 30% of retail banking customers who are extremely eager to use Apple Pay in the first 12 months of it being available in the UK would switch to a credit or debit card that could use Apple Pay, should their current provider not provide the service.

Many of these customers may have decided to do just that after the official UK launch of Apple Pay on July 14 saw a large number of people expecting to use the service unable to do so because some of the major UK banks failed to immediately offer the service despite being advertised as launch partners.

Customers of HSBC, First Direct, Barclays, Lloyds and Halifax were aggravated when they were unable to take advantage of the service and used social media to voice their frustrations. Customers who were able to successfully use the payment system were those of American Express, MBNA, Nationwide, NatWest, Royal Bank of Scotland, Santander and Ulster Bank.

It is believed that HSBC customers will be able to use the service at the end of July, while Bank of Scotland, First Direct, Halifax, Lloyds Bank, M&S Bank and TSB customers are expected to be able to use the service in September or October.

UK leads Europe in contactless usage

Data from Visa Europe has revealed that contactless payments in Europe continue to be popular with over one billion transactions made in the 12 months to March 2015. Furthermore, €1.6 billion was spent using the payment technology in March 2015. The highest number of transactions occurred in the UK with a total of 52.6 million transactions.

A further look into the data shows that the UK is the European leader in Visa contactless cards issued at 49.6 million cards, an increase of 37% since March 2014. Spain has the highest number of terminals at 593,000 compared to the UK which has 410,000.

Data also reveals that the Brits are the biggest users of Visa contactless cards, having spent more than €330 million in March through contactless payments. The high usage has been attributed to the roll out of contactless payments on Transport for London (TfL) services, with 100 million contactless journeys already having been made.

Cab:app set to rival Uber

A new mobile payment solution has been developed in the UK which is set to become a strong competitor of Uber. Payment facilitator cab:app has created an app that allows users to hail cabs with their smartphone by alerting cap:app and asking them to locate the closest cab. For drivers, the app lets them find customers and also allows them to accept mobile payments and to accept card payments through a chip and PIN reader and an NFC reader.

The app is receiving a warm response from taxi drivers, with founder of the app, Peter Shive, noting that cab:app is working with official taxi drivers of the traditional black London cabs. He stated that cab:app is “extremely excited to empower all Hackney Carriage and licensed cab

(10)

About RFi Group

RFi Group is a global intelligence and media provider focusing exclusively on financial services. We

specialise in data and information gathering, customer based insight generation and business decision

support for the world’s leading financial service providers.

Our aim is to combine global intelligence and local knowledge to provide insightful, valuable and

actionable recommendations, with a core focus on the provision of exceptional client service.

Covering 34 key global markets with regional offices in Toronto, Washington D.C., London, Hong Kong,

Singapore and Sydney, RFi Group consistently provides clients with tailored advice and independent

intelligence relevant to their specific markets and business needs.

RFi delivers business intelligence via both proprietary and syndicated research programmes.

Our syndicated research is delivered via our Financial Councils model. Up-coming Financial Council

research includes:

H2 UK Payments and Innovation Council – Results out now

Q2 UK Savings Council survey – Results out now

Q2 UK Mortgage Council survey – Results out now

H1 UK Current Accounts Council survey – Results out now

H1 UK Premier Banking Council survey – Results out now

Find out how you can access RFi Group’s latest business intelligence

Please contact Jacob Binkin for further information

Jacob Binkin

Business Development Manager

jbinkin@rfintelligence.com

+44 207 549 3620

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