Daily Research News Online no. 1743 - Packaged Account Banking

Packaged Account Banking

July 15 2002

Latest research from Mintel estimates that there are in the region of 6 million consumers with packaged current accounts. Packaged current accounts (PCAs) allow banks to charge a monthly fee of between £6 and £12 for a current account, in return for which the customer gains access to a range of additional benefits and services. Revenues generated by providers of PCAs are estimated to be in the region of £480 million.

While exclusive research points towards little apparent enthusiasm regards PCAs, Mintel has identified a potential market of some 8 million adults by 2006.

Of the 1,926 adults questioned by Mintel some 37% were of the opinion that their current account provider satisfies all of their banking needs. Similarly nearly a quarter felt that any benefits should be provided as standard. By contrast, a minority of 13% agreed that paying a small fee for benefits was a worthwhile concept. A similar number said that they would like to have a personal banking manager who they could contact when needs be, while 5% said they would enjoy the prestige of having a PCA. 'Consumers may expect access to a personal manager as a standard benefit, although most account holders will never speak to their branch manager in today's automated environment' comments Paul Davies.

The idea of a PCA adding to the prestige of an individual was favoured by respondents in the 16-24-year-old age group and the ABC1 pre/no family Special Group. 'The reality is that the prestige of paying £6 or more per month for current account services with additional benefit is available to all consumers.' comments Paul Davies.

The 13% of respondents agreeing that a fee in return for outlined benefits is an attractive proposition are skewed towards younger age groups. Some 22% of those in the 16-24-year-old age group and 16% of 25-34s agreed with the statement.

With intensive competition apparent across most sectors of financial services, consumers, and particularly younger consumers, expect providers to offer something extra, to make products stand out from the crowd. 'The balance of power has swung from the provider to the consumer, switching products has never been easier and hanging on to customers never harder. Current account holders may need to feel that they are receiving additional benefits to supplement expected service levels. It might be prudent if some benefits were included for free, particularly where they form little more than cross-selling opportunities, ie cheaper loans/mortgages with the bank' comments Paul Davies.

Higher interest rates on savings products are the most popular benefit of PCAs among consumers, some 30% of adults are attracted to this benefit. With the present current low interest rate environment, any improvement on current returns will appeal to consumers. The idea of monetary gain will offset having to pay the monthly fee for a particular account. This benefit was particularly popular among the affluent AB socio-economic group, with over 40% highlighting this as a plus point. 'In some cases consumers may get better interest rates elsewhere, for those who are prepared to shop around' comments Paul Davies.

Accidental death cover was the second most popular benefit, with nearly one in four of those questioned choosing this benefit. 'Cover is usually to the level of £10,000 and is fairly cheap for providers to include in that it is not a life policy and therefore only pays out in certain, fairly unlikely circumstances. These consumers would probably be better off paying money into a critical illness plan or life policy' comments Paul Davies.

The next two most popular benefits of PCAs are discounts on holidays and premium reductions on home insurance, with 22% and 21% of those questioned attracted by these benefits respectively. The younger age groups are more likely to choose discounts on their holidays. Some 41% of the 16 to 24 year olds opted for this benefit. Home insurance and holiday discounts do sound attractive, however, even with the providers' discounts it would still be possible to obtain price reductions by checking out all possible distribution channels, such as the Internet, teletext, newspapers and a range of high street/independent travel agents. 'Account providers would be well advised to offer and promote the type of benefit that might appeal to younger consumers, ie cheaper holidays, discounted DVDs and CDs, lower travel insurance. Overdraft rates might also be of more importance to younger consumers, who may be more prone to let their account slip into the red each month' comments Paul Davies.

Banks are frequently accused of using PCAs in an attempt to introduce fee charging for all current accounts through the back door. Once enough people are paying for services the argument goes providers will be able to justify across-the-board charging.'It does seem as if many people are happy to pay a monthly fee for their current account, as long as they feel that they are receiving additional benefits. Some 6 million customers already exist and numbers are predicted to rise as promotional activity is intensified. However, a note of caution should be added. With competition within the current account market rising steadily, it would be a brave provider to be the first to bring in general fee charging for services that have previously been free' comments Paul Davies.

Banks will see the revenues that they gain from PCAs as a fairly 'painless' way of growing profits and endeavour to ensure that this sub-sector continues on an upward trend. Consumers will be accustomed to the idea of free banking, but attitudes can be altered in time. There is even an element of flattering people into thinking that they are receiving an enhanced product as a prized customer.

Inertia will also have a role to play. Consumers have remained with fee-charging credit cards when there have been free alternatives on the market, often with lower APRs.