Packaged Accounts - Bundling Boosts Business
VRL Financial News Publishing, February 2011
The losses suffered by many financial institutions as a consequence of the global economic recession and reckless lending have served to increase the focus on how to generate maximum income from customers while at the same time boosting customer satisfaction.
The losses suffered by many financial institutions as a consequence of the global economic recession and reckless lending have served to increase the focus on how to generate maximum income from customers while at the same time boosting customer satisfaction.
Packaged accounts are not a new phenomenon, but with banks keen to move away from the concept of ‘free banking’ they represent an opportunity for financial institutions to generate guaranteed revenue.
This report looks at current thinking on the merits of packaged accounts with input from one of the world’s leading authorities on customer relationship management in the banking sector.
Case studies on leading banks across all parts of the world provide an insight into how individual institutions develop, introduce and market their packaged accounts.
A detailed breakdown of some of the accounts on offer will provide a comparison between the various features included and the cost to the customer.
This content will help readers put the packaged accounts market in context and inform views on the likely future prospects for the market.
The key takeaways from this report include:
- There is an almost infinite variety of packaged or bundled accounts offered around the world
- Banks are using packaged accounts as a competitive advantage to win new business as well as boosting customer loyalty
- Different levels of account can be used to distinguish between regular and premium customers
- Comparison sites make it easier for customers to compare the benefits included in different packaged accounts
- The features included in packaged accounts are constantly reviewed
Do good things come in (account) packages?
It is not just the aftermath of the global financial crisis that is heaping pressure on the balance sheets of the world’s retail banks. Increasing public anger towards what are widely perceived as punitive penalty charges has seen the UK industry regulator take a test case to the highest court in the land, while the US legislature has passed laws that require banks to obtain customers’ permission in order to take part in overdraft protection programmes, which will blow a massive hole in the $35 billion the banks earn from such programmes.
In the past, banks have been able to depend on the ‘loyalty’ of customers who felt that switching account was a prohibitively complicated and time consuming process. However, the proliferation of comparison and switching websites means consumers can not only compare offerings from different banks, but also move their account to a new provider relatively easily. There is already evidence that UK bank customers are switching in increasing numbers (the 2010 JD Power UK Retail Banking Satisfaction Survey found that 12% of bank customers intended to switch to another bank, while 7% had done so in 2010).
While many European consumers are used to paying a fee for their banking, US and UK customers have become accustomed to so-called ‘free’ banking since the 1980s. This creates a dual challenge for banks – how to retain customers while simultaneously charging them for a service they previously received for free.
One strategy that is gaining traction is to effectively penalise those who do not deposit specified amounts each month or have loans/ credit cards with the same provider. Santander – one of the world’s largest banks – has told customers that it is changing its overdraft charging structure to the benefit of those who buy other products from the bank, or who have large amounts of cash.
The benefits of such an approach are two-fold:
1. Firstly, the bank generates a higher return per customer from more expensive services such as loans
2. Secondly, it can use the information gathered from higher levels of customer activity to target other appropriate products more effectively.
According to packaged accounts expert Professor Merlin Stone, there is a third element to this strategy that appeals to banks – by getting customers to focus more clearly on terms and conditions, they ensure that customers understood constraints such as overdraft or cash withdrawal limits.
Despite the similarities between the US and UK markets outlined above, there is a fundamental difference in how the majority of packaged accounts are structured between the two countries.
In the UK, banks charge a monthly fee in return for a bundle of additional services, which typically include benefits such as car breakdown cover, travel insurance or credit card protection. On the other side of the Atlantic the focus is more on rewarding the customer for doing more business with the bank by giving them options for avoiding the monthly fee.
However, there is a high degree of uniformity in the services included in packaged account bundles. From the banks’ perspective the key consideration is to make sure that the services offered are very commonly required and could be purchased inbulk much more cheaply than an individual could buy them.
Travel insurance in particular has become such a fundamental element of the packaged account that developments in this market have impacted across the entire travel insurance sector. Research by YouGov SixthSense into the UK travel insurance market has found that many consumers have ditched stand alone travel insurance policies,choosing to rely on cover provided through their packaged account.
Interestingly, Lloyds – the acknowledged leader in the provision of packaged accounts in the UK since it introduced its first ‘added value’ product in 1997 – provides customers with an approximate worth of each of the benefits in their package, an approach subsequently adopted by other banks. Given that the increased availability of comparison websites has placed more information in the hands of consumers, this sends out a clear message that the bank believes it is offering its customers value for money.
What very few banks have done is enable customers to build their own packaged account by choosing the features they want from a list of benefits. With some exceptions – most notably the Co-operative Bank in the UK – packaged account providers provide a rigid list of benefits and services on the assumption that their customer research and past market experience have identified exactly what customers want from such accounts.
Banks have shown a much greater appetite for getting to know exactly what their customers do with their money.
According to research from Ovum, creating a comprehensive view of the customer is the key for banks seeking to boost profits and rebuild trust, while Brad Dinsmore (head of retail banking at Citi) reckons that improving the range of services available to customers will encourage them to bring more of their business to the bank.
Fee-earning accounts have also allowed some banks to rationalise the type of customers they attract, focusing on more affluent segments and less on low revenue generating pools. Lloyds TSB customers who hold an added-value account (as packaged accounts are sometimes described) have been found to be more loyal and have a higher net product holding across all of the bank’s products when compared to ‘free’ account customers.
Our analysis of how packaged accounts have developed in the key markets of the US, UK and South Africa revealed some fascinating details:
- The number of packaged current accounts available in the UK almost doubled between 2006 and 2010 and the average monthly fee for packaged accounts rose from £10.51 to £14.89 over the same period.
- One in six current account holders in the UK have a fee-charging packaged account.
- The percentage of checking accounts in the US that could be considered ‘free’ (that is, accounts with no monthly service charges and no minimum balance) fell from 76% in 2009 to 65% last year.
- A number of US banks have embraced ‘relationship pricing’ that allows a customer to sidestep a monthly maintenance charge by doing more business with the bank.
- New arrivals in Canada are a key target market for packaged accounts.
- The main selling point for Australian banks is how customers can avoid paying fees on their accounts,usually by making a minimum deposit each month.
- Bundling lifestyle benefits with current accounts is in its infancy in Asia.
The in-depth interviews with Citibank, Lloyds and Nedbank in chapter four uncover a number of interesting facts about the strategies adopted by these market leading packaged account providers. For instance, Citibank has moved to simplify its range of products by halving the number of packaged accounts it offers and reducing the entry level requirements for its premium account.
Meanwhile, Lloyds continues to justify its reputation for innovation in this market by monitoring the extent to which customers use each element of their bundle of benefits and providing the same credit interest options as on all its other mainstream personal current accounts.
Chapter 1: Holding the banks to account
Chapter 2: Pushing the package
Chapter 3: Packaged accounts – the global experience
Chapter 4: Case studies
Chapter 5: Unpicking the package – what have we learned?
Figures
Table 1.1: US customer confidence in the banking system
Table 1.2: Switching activity among UK bank account holders
Table 1.3: Current account interest rates 2006
Table 2.1: Interest rate comparison between packaged and ‘free’ accounts
Table 3.1: Most important factors for UK customers when joining or switching bank account
Table 3.2: Packaged accounts options, fees growth (UK)
Table 3.3: The ‘cost’ of banking in the US
- Nedbank
- Citibank
- Lloyds TSB
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