PAs differ from traditional current accounts
by offering a bundle of services – such as car, travel or house
insurance as well as beneficial savings or loan rates and
reductions at selected retailers – for a monthly fee.

The selling point is that a bank’s customer
gets this bundle at a sharp discount compared to buying insurance
products or other services individually. Cost savings in the UK
market, as stated by the banks themselves, range from £100 to
£1,800 a year (see table below).

The accounts are not universally popular, and
have been labelled as unnecessary, expensive and offering poor
consumer choice by market commentators, the media and consumer
groups. A UK personal finance magazine, Moneywise, for
instance, asked its readers in an online poll in May this year if
they thought packaged accounts were worth the cost and 88 percent
said ‘No’.

Nevertheless, according to RBI’s own
estimates, there are around 10 million packaged account customers
in the UK, each paying an average of around £160 per year in fees.
This makes the market worth an annual £1.6 billion in fees alone –
vital at a time when interest income is depressed.

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Separate market research by a UK-based market
intelligence firm called CACI puts the number of PAs at 9.4
million, or 14 percent of the 69 million active current accounts in
the country.

Philip Machin, based in the financial services
unit of CACI, told RBI: “Generally speaking, the number of
packaged accounts is on the rise and the key consumer segments that
uses them are young urbanites and young professionals.

“These are, typically, city-dwelling young
professionals and are exactly the people financial providers are
keen to attract into long-term relationships.”

4m customers with Lloyds
TSB

Over the past 12 months, Santander
and the Co-operative Bank have both rolled out PAs into the UK
market, and all the major retail banks now offer a variety of PAs
with market leader Lloyds TSB offering four.

The Co-operative Bank, which launched its new
range of PAs in September last year, said a steep rise in net new
current accounts across its fiscal 2008 trading year (March to
March) was primarily driven by a steep uptake in PAs. Dick
Parkhouse, managing director of retail banking at Co-operative
Financial Services (CFS), the bank’s parent, told RBI in
April that packaged accounts now make up 23 percent of the bank’s
current accounts compared to around 13 percent on average for other
UK banks (see RBI 610).

Parkhouse added that the PA product segment
had now become a “significant part of its consumer banking
strategy”.

Lloyds TSB, currently merging with UK rival
Halifax-Bank of Scotland, boasts 4 million customers in its PAs (or
Added Value Accounts as it calls them) earning the bank up to £700
million in fees a year.

Catherine McGrath, head of current accounts at
Lloyds TSB, told RBI the bank’s Gold product, available
for £12 per month, was the most popular of the four currently
offered. She said, of all the underlying services available, the
most popular benefits as recalled by customers are:

• AA car insurance – it has the most
number of claims;

• travel insurance; and

• mobile phone insurance (highest
registration).

According to McGrath: “The AA has rescued
nearly three million Lloyds TSB customers and is the benefit with
the highest usage in terms of the number of claims. Some of the
benefits need to be registered for and of these the most frequently
registered product is mobile phone insurance, for all types of
account.”

Research published at the start of 2009 by
Merlin Stone, professor of marketing at Bristol Business School and
research director at London-based WCL, on the UK packaged account
market found the number of accounts on offer in the UK market has
risen from 33 in March last year to 40 by the end of 2008.

The research concluded that the number of
people willing to pay money for a packaged account had gone up – as
had the fees.

Stone said the market share of packaged
accounts to traditional current accounts in the UK was now around
15 percent, and the proportion of PAs had been growing at around 3
percent a year. He said that, as regulation in the UK increases and
the pressure on banks to cut unauthorised overdraft and credit fees
also rises, banks have necessarily become more interested in
fee-earning accounts.

“Banks have suffered enormous brand damage
because of the whole issue with overdrafts and increasing
regulatory inspection,” Stone added. “There is an active move away
from [overdrafts and other fees] and a move towards making packaged
accounts much more mainstream.”

A cheaper way to sell more
products

Stone told RBI that
fee-earning accounts have also allowed some banks to rationalise
the type of customers they attract, focusing more on more affluent
segments and less on low-revenue-generating pools. PAs can also
help banks limit marketing and distribution costs for some
products, typically low-value insurance products like travel and
car insurance.

“Marketing costs on insurance can be very
high. Up to half the cost of a travel insurance product can be
spent on marketing, for instance, and [packaged accounts] can offer
a much cheaper way to sell more [products],” he said.

Asked about criticism of PAs as unnecessary,
Stone said many banks in the UK had improved the product offers to
make them more usable. But he conceded that, in the past, they had
received some bad publicity and, sometimes, rightly so.

“Banks have had some very punitive exemption
clauses and many customers never read the small print,” Stone
said.

“There was one example of a major UK bank that
offered travel insurance but had an exemption clause that stated if
the customer has visited the doctors for any reason at all over the
previous 12 months, the policy was void. The bank has now changed
this.”

Asked why Lloyds TSB had been so particularly
successful at getting people to buy into the bank’s added value
accounts, McGrath said: “When a customer comes to open an account
with us, we will sit down with them to discuss their needs in
detail to ensure that we provide them with an account that makes
the most of their money.

“Due to Lloyds TSB’s purchase power, we are
able to put together a very competitively priced account.

“If customers purchased these elements
separately it would cost considerably more. We don’t recommend them
to those who couldn’t see themselves making use of the services on
offer. However, most people have mobile phones and travel, and many
have a car, which means that the services provided will be of use
to most.”

She concluded: “Customers who hold an AVA are
more loyal and they have a higher net product holding across all
Lloyds TSB products when compared to [free bank account] customers.”

The future of packaged
accounts?

Paul McNea, a consultant working
with a South African loyalty programme specialist called Private
Label Promotion, says that customer loyalty is driven by customer
engagement and that packaged accounts necessarily ‘engage’ the
customer more.

From experience working in the South African
financial services market, where packaged accounts are relatively
commonplace, McNea said there is a growing demand for more flexible
accounts allowing customers to build bespoke packages for
themselves from a list of products and services.

“The UK is probably a couple of years away
from the widespread availability of this,” McNea added. “But with
the development of Web 2.0 functionality and similar interactivity,
the ability to offer more personalised packages will become much
more important.”