Shock! You may get value for money

Seldom has an entire industry shot itself more spectacularly in the foot. The row over cash-machine charges has confirmed people’s worst suspicions about Britain’s banks. For businesses that supposedly cater for consumers, they could scarcely have painted themselves into a worse corner – as the hole-in-the-wall gang prepared to levy a £2.50 double charge for taking a tenner out of the local cash terminal.

With everyone from the Prime Minister down blazing away at the banks, the climbdown over possible double-charging was as swift as it was ignominious. But the PR debacle – which left open the possibility of single charges of £1 or more – is no more than a foretaste of an even more gut-wrenching experience for Britain’s big banks. Waiting in the wings is the publication of an investigation which is widely expected to shake the industry by the scruff of its neck.

Over the past year, the former telecoms regulator, Don Cruickshank, has been stalking Britain’s banks. Appointed by the Chancellor at the end of 1998, Cruickshank is an abrasive individual who doesn’t pull his punches. Like the little boy who asked about the emperor’s clothes, he has been asking a rather obvious question of an industry that coins £20 billion in profits: just how competitive is it? He is due to deliver his answer within a matter of days, and it won’t make comfortable reading for top bankers.

The review’s leaked recommendations on the cash machines run by the Link network give a flavour of what lies in store. Cruickshank says that he has identified “a number of serious problems with current arrangements” and recommends a number of far-reaching reforms. Charges should be made transparent, price discrimination by big banks limited and the market for cash distribution opened up.

The banks argue plaintively that charges will be made more transparent under their new arrangements. These involve a move from so-called “disloyalty fees” – charges levied by card-issuers when you use another bank’s machine – to “surcharges” – charges levied by the bank operating the ATM where you make the withdrawal. John Hardy, Link’s chief executive, says that the charges will be clearly revealed on the screen before a transaction is made.

Transparent the new charges may be, but that’s no use if they are levied at prohibitive rates, particularly if you live in a community with little or no choice of cash machines. The Consumers’ Association thinks that charges should simply recover costs. “Our view is that you should only pay for the basic cost when the big banks have such a stranglehold over the cash machine network,” says Philip Telford, a CA policy adviser.

Link says that the average cost of a transaction is 30p. But Cruickshank has indicated an even lower price – between 15p and 30p per transaction.

The row over the cash machine network goes to the heart of Cruickshank’s overall concerns. He depicts the banking market as no more than weakly competitive, contrasting it unfavourably with the US where “in every town, small businesses seem to have the choice of half a dozen or more banks with which to conduct their businesses”. He wants to encourage much freer entry of new competitors into the industry.

That aim is likely to be helped by the Internet, which is undermining the banks’ main defence against new competitors, their huge branch network. Cruickshank widened his inquiry last spring to take that on board. But the cash-machine network, like a castle’s inner keep, offers big banks a further defensive barrier. Customers with e-banks still need cash. The ability of new entrants such as Egg to intensify their challenge in the heartland of banking – the current account – will be limited if customers are put off by high charges for ATM transactions.

John Bridgeman, director general of the Office of Fair Trading, has warned against excessive charges and said that he will be “studying the implications of ATM charges for new entry to the industry”. The banks can be expected to mount a vigorous defence against any imposition of a fixed low fee for ATM charges. Tim Sweeney, director general of the British Bankers’ Association, says that “the level of charges should be driven by the logic of the marketplace. It is patently absurd that a bank should invest heavily in a network of cash machines and then offer them as a free good to another bank entering the market”.

The main thrust of the Cruickshank report will be to sweep away roadblocks against the new competitive pressures, which include 50 new Internet-based bank services due to be launched this year. Cruickshank is expected to make it easier for customers to switch accounts to these and other banks. His report will also spur such switches by insisting on banks pricing their services much more transparently so that you know when you’re getting a poor deal.

The hardest nut for Cruickshank to crack will be the small-business market which is least exposed to new competitive pressures. He is also dealing with an industry whose customers, however much they moan and groan, are notorious for sticking with the devil they know. Telford of the Consumers’ Association says: “There is a huge customer inertia and it’s not surprising that the banks play on it; we’d like to see consumers much more active.”

Judging by the way the City has marked down banks’ shares despite their enormous profits, the moneymen think that competition is on its way. Britain’s unloved banks are going to have to fight their way back into the affections of both the public and their shareholders. Here’s a thought: offer value for money and stop taking your customers for granted.