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Why don't banks compete harder?

• Robert Peston
• 1 Mar 07, 10:28 AM

There is a mindset prevalent at our banks that the customer is usually wrong. I was reminded of this recently when having a cup of coffee with the chairman of one of the biggest banks.

He said that the worst thing about being chairman was that he was always being assailed with complaints from friends about alleged mistakes made by his bank. But whenever he investigated, it turned out his friends were simply being dim.

Perhaps this chap has unusually dim friends. But even if he does, his remarks show that few banks yet think of themselves as proper retailers, fighting tooth and claw for every customer in a competitive market.

If they did, they would operate on the basis that the customer is usually right, even when he or she isn鈥檛. But what really grates for most of us is the all-too-common experience of the banks making a genuine error and then taking an age to correct it 鈥� and only then correcting it after a lot of shouting.

Which is why many of you will bristle when I point out that the Royal Bank of Scotland has today announced a solid set of financial results: pre tax profits rose 16% to 拢9.2bn in 2006, its costs relative to income were reduced, and losses on loans stabilised. The one concern that I would have is that growth in its US operation, 鈥� in which it has invested so much 鈥� has been very lacklustre.

That said, shareholders will largely be pleased 鈥� as manifested by RBS鈥檚 share price rise this morning. And since millions of us are shareholders through our pension funds or collective investment schemes, we benefit when RBS performs well and pushes up its dividend sharply (as it has today).

RBS also incurred a 拢2.7bn tax charge in 2007, most of it payable in the UK, which is a non-trivial contribution to the public services we all enjoy.

So is it irrational to raise concerns about RBS鈥檚 success? Well, as I recently wrote in my blog on Barclays, there is a question to be asked about whether there is sufficient competition in UK retail banking (the conjunction of 鈥渞etail鈥� and 鈥渂anking鈥� is not an oxymoron, but is the business of supply banking services to individuals and small businesses). The related question is whether the big banks are earning an excessive return on the capital they have invested in their domestic retail operations.

RBS itself does appear to be having a go at competing: it claims to have the highest share of customers switching accounts from other banks. But that may make RBS the best of a lacklustre bunch, rather than a truly inspirational retailer.

What鈥檚 striking is that no bank has broken ranks on the issue of so called 鈥渇ree鈥� banking and penalty charges. Putting to one side the question of whether or not the penalty charges they levy on customers who breach agreed borrowing limits are excessive in a legal sense (which may soon be investigated formally by the Office of Fair Trading), the sheer emotion these charges generate among consumers has surely created a big market opportunity.

Wouldn鈥檛 a bank that shouted very loudly that it would cap penalty charges at a relatively low level win both goodwill and lots of lovely new business? If no bank is prepared to do make such an offer, that may demonstrate that the economic model for retail banking is too dependent on fooling customers into believing that current account services are free 鈥� which wouldn鈥檛 be healthy. And it rather shows that if there is genuine competition in the banking market, which is what the banks claim, it鈥檚 not competition as we know it, Jim.

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