AVAs swept up in the wave of digital banking

In the shadow of payment protection insurance (PPI) mis-selling, there has been increasing pressure on packaged accounts, with some people believing they will also fall foul of the mis-selling accusations that grounded PPI. Certainly, the number of complaints received by the Financial Ombudsman Service drove the FSA to introduce the new controls around sales of insurance benefits, coming into practice from 31 March, writes Rob Graham

In the shadow of payment protection insurance (PPI) mis-selling, there has been increasing pressure on packaged accounts, with some people believing they will also fall foul of the mis-selling accusations that grounded PPI. Certainly, the number of complaints received by the Financial Ombudsman Service drove the FSA to introduce the new controls around sales of insurance benefits, coming into practice from 31 March, writes Rob Graham

Despite this, the FSA highlighted research that showed many customers still value these products, whilst they also represent a valuable income stream to banks themselves. Last month, the OFT published research that showed packaged accounts fees are providing an increasing share of current account revenues, from 9% in 2007 to 13% in 2011, whilst credit interest and overdraft charges both dropped significantly, to 43% and 20% respectively. In the meantime, the same research highlighted that since their peak in 2007/08, complaints relating to current accounts have more than halved.

Arguably, the appetite for benefits has been restrained by the country’s mood of austerity. No frills accounts have risen in popularity, and hard cash incentives have attracted far more advertising space. Despite this, packaged accounts in the UK remain at the forefront in the global market. With a few exceptions such as Bradesco’s Shopfacil online shopping portal in Brasil, or Citi’s widely acclaimed, pan-bank Thankyou loyalty programme in the US, banks elswhere rarely step outside financial services. Here in the UK, however, they have been quietly repositioning their packaged account propositions, with the content increasingly viewed as an opportunity to differentiate the bank’s brand.

Lloyds only temporarily stopped offering AVA’s in-branch to enable them to update systems, citing that they were aligning the sales process across their portfolio. They are widely expected to re-enter the market later this year. Whether this will be a radical development, in the footsteps of Barclays, remains to be seen. Let’s not forget it was Barclays who forged the mould for packaged accounts 17 years ago, although Lloyds have since led the charge, reportedly accounting for a third of their current accounts, versus the industry average 14%.

In recent years, Defaqto have reported a reduction in benefits per account, with the greatest casualties being leisure benefits such as holiday discounts and entertainment ticket discounts. It would appear that banks are keen to reassert their core values, and increase their own relationship with customers: banking related benefits such as beneficial credit cards, mortgages and savings account offers have remained comparably stable.

Pure affordability will be another factor pressuring the banks’ design of packaged accounts. In the wake of the PPI scandal, the "breakage model", by which a large percentage of benefits are paid for but not used, is under significant scrutiny. Banks would do well to consider other benefits that are partly funded by partners, trading their access to a large customer base to secure value for themselves and the customer. Providing exposure to trusted brands such as Columbus Direct travel insurance or RAC roadside recovery can also help rebuild banks’ standing in the public eye.

Many people do get a lot of value from their packaged accounts. However, research has shown that most customers are attracted to a packaged account by just one or two benefits. Barclays’ introduction of a Features store last year was a bold move to introduce greater customer choice in selecting bundles of benefits. Providing customers choice will help to ensure that they make use of these benefits and get value from the product. Time will tell if Barclays have got their sums right in predicting usage rates, and hence their pricing, however, the increase in customer satisfaction should not be under-valued.

Banks undoubtedly could do more to remind customers of the benefits they have received, and new regulations enforcing banks to send annual statements to customers, reminding them of their eligibility, will help with this. However, behind the scenes, improvements to back office processes will enable banks to view their customers’ use of benefits: this will help them personalise and target their communications, and may even provide them an opportunity to contact their customers with relevant advice or further benefits in a timely fashion.

Why is this important? Use of branches continues to fall, with the OFT reporting only 16% customers visit their branch in a week, versus 56% accessing their account online or by mobile: if banks want to build and retain meaningful relationships, they need to improve their direct channels significantly.

We are also likely to see benefits becoming increasingly easy to access. Whilst the growth of mobile banking is widely reported, the delivery still lags expectation. Putting benefits online and into a single manageable site, potentially with fewer individual suppliers, will make it easier for customers to use them.

The dilemma between offering cash or discounts, versus more tangible benefits has continued for over fifty years since the earliest loyalty programmes. Ask any customer and they will more than likely request cash for its uncontested value and flexibility. Step behind the curtain, however, and from the banks’ point of view, cash incentives can often fall short when it comes to changing customer behaviour.

Cash incentives typically win the day when influencing specific, individual decisions, such as switching or opening an account. Santander’s 123 account has been widely put to task for this objective, along with a host of others offering £100 to switch your account.

Where cash falters, however, is when engaging with existing customers. Cash back accounts provide limited opportunity to build more meaningful customer relationships in the way that AVA’s do. Receiving £5 cashback each month can easily be hidden amongst day to day expenses; thanking your bank when you enjoy your Priority Pass access to an airport lounge on your holiday carries far greater perceived value.

What appears most certain is that no specific fee-paying account structure will win through. The trend is towards differentiation: combining greater variety, whilst retaining simplicity through reducing the benefits per account. This comes hand in hand with customer choice and a degree of personalization that will ultimately bring customer service and satisfaction back to the fore.