LLOYDS BANKING GROUP PLC CMA RETAIL BANKING MARKET

47653462

LLOYDS BANKING GROUP PLC

CMA RETAIL BANKING MARKET INVESTIGATION

Response to the CMA's ‘supplemental notice of

possible remedies’

22 MARCH 2016

LLOYDS BANKING GROUP PLC

Response to the CMA's ‘supplemental notice of possible remedies’

1. KEY CONSIDERATIONS FOR CMA’S SUPPLEMENTAL REMEDIES

1.1 From the start of this inquiry, LBG has supported the development of a holistic set of

remedies to enhance customer engagement and drive greater customer choice, customer

control and competition in the PCA sector. LBG has consistently expressed the view that

any remedies that aim to change customer behaviour need to be tested and trialled to

ensure that they are as effective as possible and do not lead to unintended consequences.

LBG has carried out a series of tests and trials during the course of the investigation and

shared the data with the CMA to show the CMA why testing and trialling matters in

remedy design and to help build a solid base of evidence for any proposed remedies.

1.2 It is difficult to comment on the CMA's possible supplemental remedies in isolation

because it is not clear:

(a) how these supplemental remedies combine with the CMA’s originally proposed

remedies, or with the additional remedies on which the CMA invited comments (on

18 December 2015), and whether these are complements or substitutes; and

(b) what the CMA’s current view is on testing and trialling proposed remedies, given

that many of the proposed remedies would clearly need testing and trialling to see

whether they have the intended effect before implementing them.

What are the CMA’s proposed overdraft remedies trying to achieve and what are

the practical limitations given current customer behaviour and the use of

different payment methods?

1.3 The CMA has set out a package of proposed remedies for PCA customers that aim to:

(a) increase engagement for all customers by making it easier for customers to

compare costs, shop around and switch;

(b) change customers’ behaviour by increasing customer understanding about the

cost of their PCA and giving them prompts and tools to manage their usage and

charges.

1.4 The two sets of proposed remedies issued after provisional findings (“Invitation to

comment on additional remedy suggestions” of 18 December 2015 and the “Supplemental

notice of possible remedies” of 7 March 2016) have a particular focus on the 45% of PCA

customers who use overdrafts. There are specific proposed remedies to increase

engagement for this group of customers (e.g. overdraft eligibility checker and maximum

monthly charge “MMC”) and to change overdraft behaviour (e.g. alerts and opt-outs).

1.5 As explained in LBG's previous submissions of 8 January and 12 February 2016, there

may be constraints on what can be achieved to help customers change their overdraft

usage. These constraints follow from: (a) the diverse range of payment mechanisms

currently used by customers; and, (b) the significant innovation in payment mechanisms

that is also underway that is changing customer demand for different payment

mechanisms.

Payment mechanisms used to make regular payments

1.6 Customers use a range of payment mechanisms today to make regular payments to pay

for household bills (e.g. Council tax, energy, mobile and broadband), other financial

services products (e.g. insurance and settle credit card bills) and manage subscriptions to

relatively new services such as PayTV (e.g. Netflix and AmazonPrime) and streaming

services (e.g. Spotify and Tidal). These can broadly be divided into:

(a) services such as direct debit (and new payment providers that use this

mechanism such as GoCardless) that are based on the Bacs scheme and rules;

(b) services that are based on the two main card schemes (Visa and MasterCard) and

use a debit card and a Continuous Payment Authority (“CPA”) (e.g. Stripe and

AllPay); and

debit card or Faster Payments to pay their bills either through their bank (in

branch or online), at a Post Office or using services like PayPoint.

1.7 There is also a range of existing non-PCA providers and new entrants using existing

payment schemes to develop new and simpler ways for customers to pay regular bills and

understand and control their expenditure. Some of these payment schemes (e.g. PayPal

and Klarna) and merchants (e.g. Amazon) are also introducing credit products at the point

of sale so that they are beginning to compete directly with overdrafts offered as part of

the PCA bundle.

1.8 Each different option has advantages and disadvantages for customers. Direct debit is

relatively simple to set up, requires minimal ongoing effort and is easy to cancel –

customers can simply access a list of all of their monthly direct debits online through their

PCA provider and cancel a direct debit online with a single click. It also provides

important guarantees for customers in the event of fraud or error with immediate

recourse for compensation to their current account provider. Many service providers offer

discounts if customers choose to pay by direct debit (e.g. energy companies). But some

service providers (e.g. mobile phone operators) have variable monthly direct debits so the

customer is not able to control how much is paid each month. Direct debits also run on a

batch process from Monday to Friday and therefore will not always be taken on the same

date each month. If the date falls on a weekend or bank holiday the payment will come

out on the next working day.

1.9 CPAs have many similar features, but because the mandate sits with the card schemes, it

can be harder for customers to keep track of what commitments they have made, and

there is no current functionality online for customers to identify all of their current CPAs.

The FCA investigated CPAs in 2013 and found that they are relatively easy to set up but

can be hard to cancel, causing problems for consumers trying to manage their finances.

The FCA agreed with providers that they will ensure that when a customer asks for a

recurring payment to end then that will be sufficient to cancel the arrangement. Providers

also confirmed that should a payment go through by mistake following cancellation, the

customer will be refunded immediately.

1.10 Many customers choose not to use regular payment mechanisms because they lose

control of the timing of the payment, and suppliers can make errors (as the CMA will be

aware from the energy market investigation) or vary the amount significantly and

unexpectedly. Many customers therefore prefer other methods for paying suppliers.

Customers may instead pay using debit cards or with cash at the Post Office or Paypoint,

or through new mechanisms such as the ‘Allpay’ app.

1.11 Service providers and merchants can also choose which payment options to use, and

many give customers a range of choices (see annex for examples). For utilities and other

regular payments, direct debits are one payment mechanism used by customers. But

some service providers have also chosen not to offer direct debits. Services such as

Netflix, Spotify and Amazon Prime do not use direct debit, but instead use debit card

based mechanisms such as a CPA, iTunes or Paypal, which can be more flexible for service

providers. The price of different payment systems for merchants and service providers

will vary by payment mechanism and the volume of payments and will be a factor in what

providers choose to offer. Lloyds Bank charges SME customers (turnover less than £1m)

up to 10p per transaction; Gocardless charges 1% (up to £2) per transaction (using the

direct debit system), Stripe charges 1.4% + 20p and Paypal charges up to 3.4% + 20p.

1.12 These differences between payment mechanisms mean that no one approach dominates,

and the landscape is changing as customers migrate to other services. Direct debit is the

preferred payment method for only 66% of the UK bill paying population.

Around 42% of

energy customers do not use direct debits, and the volume of energy direct debits has

fallen by 18% since 2010.

The volume of direct debits for other important payments (e.g.

mortgages, insurance and council tax) has similarly fallen by 21% in the same period.

Other payment mechanisms have been growing. GoCardless started in 2011 and by 2015

was processing payments made to 10,000 SMEs. Payments of over £7.5 billion are made

each year through CPAs - over one in ten UK households now subscribe to Netflix using a

CPA.

Paypoint processes around 420 million transactions per year, including energy and

household bill payments.

Payment mechanisms for individual transactions and approaches to help manage

overdraft usage given diversity of payment systems

1.13 For individual transactions, there are several options that customers can use to pay. At

the point of sale in a physical location, customers can use cash, cheque, debit and credit

cards. Increasingly, customers can also use online options, such as Paypal, which itself

offers a choice of drawing funds from multiple PCAs, multiple credit cards, deposits held

on the Paypal account, or an unsecured credit line. For online purchases, customers can

still use debit and credit cards, as well as alternatives including Paypal and Gocardless

(which uses direct debit system). Zapp which, if adopted, will use the Faster Payment

network for in-store and online transactions direct from a PCA.

1.14 Some of these payment mechanisms allow payments to be made in real time, and some

do not. For some, the value and timing can be controlled by the customer and their PCA

provider (e.g. standing orders) and for others the service provider sets the value and

timing (e.g. CPA or direct debit). This means that the balance in an account at any time

is not a complete picture of the funds a customer has available for any discretionary

spending, and so whether a customer will enter an unarranged overdraft either

immediately or soon after they make a payment.

1.15 To help customers manage this uncertainty, providers have developed a range of tools to

make it easier for customers to budget and control their monthly spend. Tools such as

mobile banking and text alerts can help to give information on a customer’s current

balance. Providers are also innovating to give customers predictions of balances at the

end of the month using data on regular payments and other transactions (e.g. Halifax

Balance Extra) and Atom’s planned ‘telepathic’ banking which can help to manage or avoid

overdraft use over the whole month. These tools give customers flexibility in how to

manage their spending, they work irrespective of the payment mechanisms used by each

customer, and will adapt to the changes in payment choices underway.

Bacs. www.bacs.co.uk/Services/bacsschemes/directdebit/Pages/Collecting.aspx.

Ofgem, “Retail Energy Markets in 2015”, paragraph 2.4.

FCA press release, “FCA reminds banks of their obligations when cancelling Continuous Payment Authorities”; and

The Telegraph, “Netflix signs up more than one in 10 British households”, 11 August 2014.

Paypoint, “Half yearly financial report for the 6 months ended 30 September 2015”.

1.16 An alternative approach to help customers budget and control their spending is to remove

the ability to make payments using some or all payment mechanisms that would take a

customer into an unarranged overdraft. This includes the current Control facility and the

CMA’s proposal for a partial opt-out for some transaction types (e.g. debit cards). It is

not clear that this approach works as it takes away the flexibility to make important

transactions from customers, and it risks exposing them to higher prices (if they cease to

use direct debit), payment penalties (if they miss direct debit payments), negative

impacts on their credit files (that can affect their access to and the price they pay for

credit) and service interruption. A partial opt-out for debit cards does not work for those

customers who use debit cards or cash for utilities and other services, and will become

outdated as a result of continuing innovation in payment mechanisms towards systems

based around debit cards, such as Paypal and CPAs.

1.17 There is already extensive innovation in relation to tools which help customers manage

their PCAs. In developing its proposed remedies to change customers’ overdraft

behaviour, the CMA must avoid over-crowding this market unnecessarily. This is one of

the most important ways that new entrants and existing providers can seek to

differentiate themselves and drive competition for customers.

1.18 The CMA should also avoid the unintended consequences of more prescriptive regulation

on products and pricing. This may result in lower overdraft charges, but much higher

energy or other household bills, or negative impacts on customers’ credit scores, if regular

payments are missed.

The CMA needs to set out effective processes for behavioural research

1.19 LBG’s understanding has been that the CMA agreed with the need to use testing and

trialling where remedies aim to change behaviour to ensure they are effective and do not

lead to these sorts of unintended consequences. LBG is concerned that the CMA may be

moving away from this. There is still no clear process to undertake behavioural research.

The CMA has now indicated behavioural testing would be “challenging” and “may not be

necessary” in some instances. The CMA has also now published research, which LBG has

previously commented on, that does not provide sufficiently robust insights given its

hypothetical nature and lack of relevant context.

1.20 There is no short-cut to using behavioural research for many of the CMA’s proposed

remedies. The CMA has been clear in the Energy Market investigation that “a priori

reasoning can provide useful insights into the sorts of interventions that may help, but

rigorous evidence is needed to ensure that those interventions that are most likely to

make a difference for given customers at a given point in time are implemented”.

There

are many examples where the response of customers to communications is not intuitive:

(a) annual summaries were introduced by the OFT with a reasonable belief that

providing information on charges would lead to customers taking action. However,

the FCA found that annual summaries had no impact on behaviour. The

investment to make these changes might have had more impact if they had been

trialled with different variants;

(b) the CMA is considering remedies which could mean customers get more alerts on a

more frequent basis. The combined effect of these alerts is uncertain, particularly

for those heavy overdraft customers that are likely to receive many different alerts

across different products. In LBG’s trial of text alerts, heavy unplanned users

were more likely to opt-out of the trial and so did not receive any alerts; and

LBG's response to CMA remedies customer research, 14 March 2016.

CMA, “Energy Market Investigation: Summary of provisional decision on remedies”, paragraph 126.

overdraft costs, planned limits, grace periods, MMC and switching. Customers can

respond to multiple and complex messages by taking less action than if there are

fewer and simpler messages. LBG home insurance renewal trials found that

simple, short renewal notices were the most effective at driving more shopping

around at renewal.

1.21 Trials are critical to ensuring that behavioural remedies are effective, but the process will

require a detailed, transparent and iterative programme to identify what works. This does

not mean that action has to be delayed. The CMA can take some actions quickly. For

example, customers could be auto-enrolled into providers’ existing overdraft text alerts.

Trials can then be used to refine the design and messaging included in these alerts. LBG

remains willing to support trials of the proposed remedies.

1.22 There will need to be a process, with effective governance, to direct these trials and

iterate the design of proposed remedies until the behavioural evidence is strong enough to

specify remedies for all providers to implement. In the energy market investigation, the

CMA has made “a recommendation to Ofgem to establish an ongoing programme to

identify, test (through randomised controlled trials, where appropriate) and implement

(for example, through appropriate changes to gas and electricity suppliers’ standard

licence conditions) measures to provide domestic customers with different or additional

information with the aim of promoting engagement…including a recommendation to

conduct randomised controlled trials concerning” a shortlist of measures.

1.23 If the time available for the CMA to conduct behavioural testing is limited, then this should

be handed over to the FCA, which has the capability, with the same recommendation as in

the energy market investigation. The FCA can then take forward many of the proposed

remedies suggested by the CMA. This would ensure that the final set of remedies is as

effective as it can be, and that any ineffective remedies do not slow down implementation

and are removed before the investment to deliver them is made.

1.24 The PCA process can be joined up with other work, such as the FCA’s market study of

credit cards. Many of the customers that are most likely to be heavy users of overdrafts,

and are potentially less engaged in the market, are also likely to have other unsecured

debts – credit card customers with ‘problem debt’ hold over half of their unsecured

lending with other products including overdrafts. There are two important implications for

the CMA’s proposed remedies in PCAs, and why these behavioural tests and trials should

be joined up with the FCA.

(a) first, prompting customers about credit card and overdraft usage repeatedly in an

uncoordinated way is likely to reduce engagement, cause customers in this group

to opt-out, or take action in one product which costs more in the other product.

The work to develop remedies in each product area needs to be coordinated to

avoid these unintended consequences, and not undertaken in single product silos;

and

(b) second, solutions for these customers should focus on the problem of their debt.

Communication to this customer group should not be determined by the product,

but should instead send messages and provide tools to help with debt, e.g.

referral to StepChange (a leading debt charity).

Next steps for proposed remedies

1.25 In its response to the original Remedies Notice in November 2015, LBG set out its views

on how the original proposed remedies can now be taken forward. This can now be

CMA, “Energy Market Investigation: Provisional decision on remedies”, paragraph 11.10a.

updated. Together with the supplemental remedies, these can broadly be split in to three

groups:

(a) proposed remedies where the immediate next step should be to move

quickly to implementation. This group largely relates to those proposed

remedies that seek to make operational changes or require functional builds that

third party providers can undertake or which already exist in some form. Delivering

these proposed remedies quickly will also contribute towards the success of other

proposed remedies intended to influence customer behaviour;

(b) proposed remedies where trials are a necessary next step before any form

of rollout. This group largely relates to those proposed remedies that seek directly

to influence customer behaviour; and

governance arrangements. This applies to the development of APIs, increasing

awareness of CASS and a programme of trials. The current governance

arrangements are unlikely to be effective at delivering the CMA’s proposed

remedies.

Figure 1 CMA proposed remedies grouped by suggested next steps

1.26 A full assessment of each of the supplemental remedies is required. In the time available,

LBG has not been able to do this. LBG has highlighted where it believes there may be

issues with feasibility in the response below. However, this assessment may need to be

revisited if LBG identifies issues or costs that are not yet apparent.

2. COMMENTS ON SPECIFIC SUPPLEMENTARY REMEDY PROPOSALS

2.1 This section comments on each of the proposed remedies set out in the Notice on

Supplemental Remedies (“Supplemental remedies”).

Overdraft remedy 2 and 4 - Measures to regulate prices

2.2 The CMA has proposed some remedies that would regulate prices or products. This

includes unarranged overdraft charges (overdraft remedy 4), a capped MMC (overdraft

remedy 4) and the price of unarranged overdraft opt-out products (overdraft remedy 2).

2.3 LBG agrees with the CMA that there would be unintended consequences of price control

remedies for unplanned overdrafts. The Behavioural Insight Team responded to the CMA’s

energy market investigation that price controls can:

(a) create a strong “anchor” price, which “might cut out some very high tariffs but

that may also risk pulling other lower tariffs close to this margin up”; and

(b) may reduce incentives for consumers to switch because “they may think they

don’t need to switch because they are ‘safeguarded’ ”.

2.4 Price controls would undermine the effectiveness of other proposed remedies aimed at

increasing competition for overdraft users, reduce differentiation between providers, harm

entry and expansion and are “likely to reduce the credit risk that PCA providers are willing

to take on and the amount of unarranged credit that they offer to all customers”.

2.5 These serious risks of unintended consequences apply to price controls on unarranged

overdrafts, as well as to caps on the MMC and prescriptive regulation of unarranged

overdraft opt-out products. Such proposed remedies should not be pursued.

Overdraft remedy 2 - Measures to encourage PCA customers to make an

informed choice on their overdraft options

Measures to prompt customers to make a choice

2.6 LBG already offers customers an active choice between products with and without

unarranged overdrafts, and supports the CMA in ensuring this practice across the industry.

2.7 LBG also agrees that existing customers could be prompted about the availability of an

opt-out, but these prompts will need to be trialled and targeted to ensure:

(a) the prompts are effective (e.g. that they are not seen as product marketing

messages);

(b) the prompts do not reduce the effectiveness of other messages sent to customers;

and

and are able to manage appropriately if they opt-out, e.g. customers that opt-out

do not incur costs of missed payment penalties, poorer credit ratings, and higher

prices from not being able to use direct debits. Payment schemes such as Bacs

may be best placed to help customers manage their regular payments if they opt-

out, as described in paragraph 2.13 below.

See “Behavioural Insights Team response to Energy market investigation: Notice of possible remedies”.

Notice of Supplemental Remedies, paragraph 152.

2.8 The CMA should also consider prompts to customers to review their planned limit where

they may be eligible for a limit or a higher limit. This could help customers to avoid

unarranged overdraft charges. LBG trialled such a remedy and found that when a text

alert was used to communicate this option to customers with an existing planned limit,

there was a 42% uplift in customers changing their limit.

2.9 The reach of these proposed remedies, either for an opt-out or a planned limit increase,

may also be limited if these prompts are deemed to be product marketing, as around half

of customers have opted-out of marketing messages. The CMA will need to engage with

the ICO and develop remedies that don’t have limited reach if they are deemed to be

marketing communications.

Measures to allow PCA customers to opt out of some types of transactions

2.10 The CMA proposes a remedy that would give customers the flexibility to opt-out of certain

transaction types (e.g. debit cards) whilst allowing other payment (e.g. direct debits) to

be made. The aim of this proposed remedy is to make an unarranged overdraft opt-out

more attractive to customers by ensuring that important regular payments are still

authorised.

2.11 This proposed remedy should not be pursued. The partial opt-out the CMA envisages will

not work in practice given the different payment mechanisms that customers use today

and will quickly be outdated as behaviour changes and as a result of the high level of

innovation and competition in payment mechanisms (as described in section 1 above). A

partial opt-out is likely to be less attractive than the existing full opt-out.

2.12 If the CMA decides to continue to pursue this potential remedy it needs to collect data

from payment providers, card schemes and Bacs (for direct debits) to understand

customer behaviour today, what is driving the trends in payment mechanisms and how

much and why are customers and providers substituting between payment mechanisms

now and in future.

2.13 After examining this data, the CMA should consider whether opt-out products can be

made more attractive by giving customers better tools and more control over regular

payments, rather than by introducing a partial opt-out. Such tools may be best delivered

through payment systems, rather than PCA providers. This is because payment systems

have relationships with both PCA providers and payment originators and can bring

together regular payments for customers that multi-bank. If developed through API based

technology it would then be open for PCA providers to embed these in their own online

banking and mobile apps.

2.14 Bacs already has an app to help customers monitor and manager their direct debits and

could use APIs to enhance this with automation about payments and by combining

information from originators about the consequences of missed payments (which

originators are required to provide as part of the scheme rules). For debit cards, Visa has

recently announced the launch of its Consumer Transaction Controls in the USA which will

enable customers to limit transaction size and set spending limits. Customers could use

these tools directly, or they could be integrated into PCA providers’ mobile banking or

account aggregators (e.g. Money Dashboard) using APIs. These tools would also enhance

CASS, as customers would have visibility of regular payments that have not been

transferred, including CPAs (i.e. to help deliver the CMA’s remedy 10).

2.15 A partial opt-out is likely to be less attractive to customers than a full opt-out and the

benefits to customers would be difficult to explain:

(a) customers would still enter into an unarranged overdraft – LBG estimates a

significant proportion of payments into unarranged overdraft use direct debit or

cheque - and incur unarranged overdraft charges, whilst losing the flexibility to

make certain payments;

(b) payments that the customer expects are not going to take them over a planned

limit may still result in an unarranged overdraft position because of the timing of

other payments;

which means some services would still be paid, but others would not, depending

on the payment mechanism, without an apparent rationale for the customer; and

(d) there are other products available with greater flexibility and/or protection against

charges including packaged accounts (with up to £300 interest and fee-free

overdrafts), applying for or increasing a planned limit, basic bank accounts that

are completely free, and the existing Control Facility.

2.16 All of these problems with a partial opt-out are likely to confuse customers about which

payments will be made, which services are liable to be withdrawn, and whether

unarranged overdrafts are being used.

2.17 The CMA is not well placed to prescribe the products that should be available in the

market. Some providers may choose to offer a partial opt-out product if customers value

it and if it is able to generate a contribution to fixed and common costs across the

portfolio of customers that choose it. Such providers should be able to benefit from this

innovation and differentiation.

2.18 The alternative approach to opt-outs is to help make customers more aware of their

current balance and to predict their balance at the end of the month. Some of these tools

are already available, and predictive tools are emerging. As the CMA’s proposed remedies

help customers to be more aware of unarranged overdraft charges and better able to

compare and switch, then competition will focus on the development of tools and products

for unarranged overdraft customers, as it has already for credit interest and rewards.

Measures to allow customers to opt-out of payment at point of sale

2.19 LBG agrees with the CMA’s decision not to prescribe customer authorisation solutions for

debit cards at the point of sale in a physical location, given the potential inconvenience

and costs for customers and merchants. Overdraft alert services and mobile banking will

give customers greater control over their use of an overdraft for these transactions.

2.20 However, there may be opportunities for the increasing number and value of online

transactions and CPA payments to give customers other choices, rather than make a

payment. This may mean the ability to opt-out of an online transaction, or to be given

other options, such as paying in monthly instalments by direct debit for larger purchases

(e.g. car insurance), or changing the payment date of a CPA.

2.21 The card schemes and payment schemes (such as PayPal) will be best placed to develop

these technologies and the CMA should engage with Visa, MasterCard and Zapp to explore

how such technologies could develop in future, and how they could be accelerated. The

CMA should consider recommendations to the PSR to monitor these developments and

ensure the right environment for them to emerge.

Measures to offer unarranged opt-out for free with any product

2.22 The CMA’s supplemental remedies would require providers to offer an opt-out for no

additional cost (such as a monthly fee or removing rewards) and to make the opt-out

available for customers holding any product. These suggested remedies are not needed

and would have serious unintended consequences for customers.

2.23 A PCA is a bundle of services including lending, transactions, deposit holding and the

flexibility to make payments when funds are not available. Providers differentiate and

compete on the type and level of charges for different aspects of this overall bundle of

services offered. Customers each pay for these services in different amounts and in

different ways – some customers pay more in credit interest, some in interchange and

some through overdraft charges. Providers expect that the portfolio of customers holding

each product will make a contribution to fixed and common costs over time.

2.24 Accounts with a Control Facility provide many of the normal features and services of PCAs,

except use of an unarranged overdraft. These products have higher costs to manage, such

as issuing a restricted use debit card and additional processes to avoid customers making

payments that would take them into unarranged overdraft. Providers also forgo all

unarranged overdraft fees compared with other products (except basic bank accounts).

2.25 Given these factors, it is reasonable for these products to charge an additional fee (such

as a monthly charge or reduction in rewards). The decision over whether to do so and the

level of any fees should be determined by the market, and providers take different

approaches.

2.26 As the CMA’s package of proposed remedies helps customers to engage with their product,

including by reducing overdraft usage and costs, and facilitate more effective shopping

around for PCAs, this will increase the pressure on providers to innovate and improve

their overdraft products and quality of service in the same way they have with credit

interest and rewards. Regulation to force all providers to do so would reduce the ability of

these providers to differentiate and compete, such as by offering innovative overdraft

products at lower prices, and the incentives for customers to shop around.

2.27 LBG already waives the control fee for some customers in financial difficulty. LBG has a

policy to provide vulnerable customers that enter the collections process a free Control

Facility on their account for six months. The purpose of the policy is to provide time for

customers to improve their financial situation, and reassure them that they will not incur

any further charges related to unarranged borrowing during this time. Eligible customers

can also open a BBA for free to avoid using an unarranged overdraft.

Overdraft remedy 4 - a monthly maximum charge for using an unarranged

overdraft

2.28 The CMA has suggested using an uncapped MMC to help increase the prominence to PCA

customers of the cumulative effect of unarranged overdraft charges. LBG supports this

idea in principle, which can build on the development of tools to help customers

understand the cost of a PCA based on their actual usage. (See paragraph 2.2 above for

comments on a capped MMC.)

2.29 The CMA’s proposed remedy is for providers to publicise the MMC with customers. Whilst

communicating the MMC could be an effective way to engage unarranged overdraft

customers, this may not necessarily the case for all customers and there may be negative

impacts. For many customers that do not use unarranged overdrafts, or are light users,

the MMC may not be relevant. Even for heavy unarranged overdraft customers, the MMC

could potentially confuse customers or lead them to ignore other information depending

on how it is used. Using the MMC in some alerts may crowd out other messages from

being received by customers.

2.30 The only way to find out how the MMC can be effective, and the extent of any negative

impacts on customer understanding, is to use targeted trials and behavioural tests of

different communications. For example, RCTs using variants of overdraft alerts that

include the MMC, or tests of online application processes where the active choice of

whether to have an unarranged overdraft is accompanied by information on the MMC.

2.31 The MMC as specified by the CMA is one simple value that could be used for these trials.

However, the MMC hides the distribution of charges. It is possible to design pricing tariffs

that have high average charges, but a low maximum (e.g. high daily charges or

unpaid/paid items, but a low cap). The CMA could examine these effects in its pricing

analysis and look at how actual overdraft charges (including RIFs and PIFs) based on real

customer behaviour correlate with the ranking of the MMC and also the OFT overdraft

charging scenarios. Alternative metrics could be included in a trial, such as using

distributional information on overdraft charges (e.g. publicising the top decile value of

unarranged overdraft charges actually incurred).

2.32 The CMA also envisages the MMC being disseminated by PCWs and consumer groups if it

is useful in engaging customers. The CMA could work with a PCW to test the effectiveness

of using a MMC in comparisons using behavioural testing, such as an online RCT, or using

eye-tracking technology in a behavioural laboratory.

2.33 More useful information could be provided to PCWs as part of remedy 5 (e.g. distributional

information on unarranged overdraft charges). This data could be provided to PCWs using

APIs, along with other internal data on service quality. See comments on remedy 5 below.

Overdraft remedy 1 - Prompts and alerts to inform customers of imminent and

actual overdraft usage and charges

Require PCA providers to automatically enrol customers into overdraft alert services

2.34 LBG has argued for a requirement to auto-enrol customers and believes that this could be

done quickly with existing text alerts or new push alerts offered by providers. This would

give the CMA early impetus to improve engagement for overdraft customers, whilst

improvements to these messages are tested.

2.35 However, there are some issues and costs of auto-enrolment to consider. These include

the following:

(a) there is a significant cost to deliver the bulk upload of mobile numbers for text

alerts. Current systems have been built to allow individual customers to provide

mobile numbers and activate alerts. LBG is instead investing in delivering push

alert functionality which would be available for all mobile banking customers;

(b) providers do not have mobile numbers or email addresses for all customers.

Providers may differ in the coverage of any auto-enrolment depending on their

current information and effectiveness of prompting customers to provide mobile

numbers;

be dependent on the customer to update them with their latest contact details

should they change;

(d) terms and conditions need to be updated for all customers, although only 45% of

customers use an overdraft. This will have a significant initial one-off cost; and

(e) there are some concerns relating to data protection, particularly for alerts that

combine messages about other products (e.g. availability of an opt-out). The CMA

can help to provide guidance on how customers that have opted out of marketing

should be treated by working with the Information Commissioner’s Office.

2.36 The CMA should also speak to entrants in the market about the impact auto-enrolment

could have on their ability to innovate and differentiate with new tools and services, such

as by introducing push alerts for all customers.

Require providers to offer range of alerts

2.37 LBG does not currently offer all the alerts suggested by the CMA, but these could be

developed and added to the current range. The CMA also suggests adding other

messages to alerts, such as the MMC, ability to change planned limits, grace periods and

charge notifications. Any new alerts or new messages should be trialled first to ensure

they are effective.

2.38 The CMA proposes that the requirement should be technology neutral (e.g. text alerts,

push messages, email or voice messages). LBG agrees that the question of technology

should be left open, but this is not something that providers would be able to compete on.

Following a programme of trials, the CMA will be able to identify which prompts, which

messages and which channels are most effective at enhancing engagement. The CMA will

then need to specify clearly how these prompts should be implemented so that each

provider does so to the required standard.

2.39 It will be necessary for regulation to ensure that all providers meet these specifications.

As with existing requirements for communicating information to customers, if providers

fail to deliver the required prompts, then the regulator must have the power to enforce

the relevant requirements. There is no effective alternative to having this prescriptive

process in place.

2.40 ATM alerts should also be considered for customers without mobiles or for whom providers

do not have email addresses or mobile phone numbers. However, ATM balance enquiries

are a service provided by ATM operators (around 56% of machines are operated by non-

banks and the provision of non-bank ATMs is highly concentrated) for which they earn an

interchange fee that is high and increasing – from 14.9p/request in 2013 to 18.9p/request

today and expected to rise significantly more - at a time when other technologies are

reducing the cost of tracking balances. This makes ATM balance enquiries an increasingly

costly service to provide to customers relative to low cost alternatives such as push alerts.

2.41 The CMA should recommend that the PSR study ATM interchange fees to ensure they give

the right incentives today and in future to develop services to help customers manage

their overdraft usage. This will require oversight and governance through LINK, and the

flexibility for providers to opt-out if they can provide as or more effective prompts through

other lower cost channels, e.g. push alerts through mobile.

Requiring PCA providers to send messages to their customers that succinctly describe the

total charges incurred

2.42 LBG already extends to the rest of the UK the current NI Order that requires PCA

providers to notify a customer before overdraft charges are deducted.

2.43 New messages about cumulative charges may help to enhance customer engagement and

understanding. However, this is not necessarily the case as the cumulative effect of other

messages and information that customers receive may reduce engagement. It is

therefore important that further requirements to send messages to customers are tested

to ensure their effectiveness.

Prohibiting PCA providers from including arranged overdrafts within the definition of

‘available funds’

2.44 LBG supports the harmonisation of the definition of ‘available funds’ when balances are

presented. However, the language used to help customers understand their balance

position should be tested to identify what is most effective and avoid confusion (e.g. a

customer believing they do not have available funds even if they have an agreed overdraft

facility).

2.45 The presentation of balances on ATMs is a service provided by the ATM operator who

earns an increasing interchange fee for this service. The CMA should speak to LINK about

how the presentation of balances can be changed across the industry and about the

potential cost of doing so. The CMA should also recommend that the PSR study the

pricing mechanism to encourage greater use of ATMs for balance enquiries for customers

without access to mobile banking without imposing excessive or inefficient costs on PCA

providers and, ultimately, customers.

Overdraft remedy 3 – suspension periods for unarranged overdrafts

Require PCA providers to offer a minimum grace period or pre-defined cut-off time when

customers can take action to avoid charges

2.46 LBG already offers a grace period (using the CMA’s definition) up to midnight, which

applies whichever transactions a customer makes to enter an arranged or unarranged

overdraft. A cut-off time of midnight is what most customers would expect. Giving

customers a flexible cut-off time (e.g. 24 hours after entering an unarranged overdraft) is

not feasible given the different settlement times for different payment systems. The CMA

should consider harmonising the cut-off time to midnight across the industry to make it

simpler to communicate to customers, particularly those that multi-bank or who switch

providers.

Require PCA providers to put in place measures to alert customers to the availability of

grace and retry periods when they are in a position to benefit from them

2.47 LBG would support measures to alert customers to the availability of grace and retry

periods in principle, and this information could be added to existing alerts. However, as

with other overdraft alerts, including new messages about grace periods and retries

should be trialled to ensure that they are effective and do not reduce the effectiveness or

crowd out other alerts.

Remedy 5 – Service quality metrics

2.48 LBG provided extensive comments on Remedy 5 in its “response to information request on

possible service quality metrics” of 25 February 2016. LBG explained the need for ‘open

data’ on service quality metrics to be provided using APIs to comparison tools.

2.49 Service quality, like pricing, cannot be averaged across each provider. Quality of service

will depend on a customer’s preferred channels (i.e. digital, telephone banking or in-

branch banking), to a certain extent (for heavy branch users) the customer's location, and

how a customer uses their account including how they use unarranged overdrafts.

2.50 API-enabled comparison tools will be well placed to provide these personalised service

comparisons, alongside personalised information on unarranged overdrafts, if they have

access to comparable metrics for a comprehensive list of quality facets for relevant

segments across all providers. In its response of 25 February, LBG considered that the

CMA’s suggested list of quality facets was not exhaustive and that it would need to be

expanded to give comparison tools the ability to personalise service quality comparisons.

Metrics on unarranged overdrafts, including those suggested by the CMA in the

supplemental remedies could be included in this list.

2.51 The CMA does not need to prescribe specific metrics. The OBWG is the correct vehicle to

deliver the data for service comparison, using the right mechanism (i.e. an API) and with

the ability to evolve and develop the data requirements over time as providers innovate

and new metrics emerge.

2.52 However, as LBG said in its 25 February response, the appropriate governance framework

needs to be in place to deliver the OBWG's plan. The CMA needs to ensure that the needs

of price comparison tools are represented in the OBWG and that providers are compelled

to provide relevant and proportionate data on quality facets that may not yet be in the

public domain, including unarranged overdraft usage. As with price comparison and

sharing of credit information, the development of these APIs needs to be prioritised by the

OBWG.

2.53 Some of the metrics suggested by the CMA, such as satisfaction metrics, do not require

information from providers. PCWs and other consumer groups can commission their own

surveys, or use existing information from market research firms. The CMA should, as a

starting point, understand what external research and metrics are currently available,

whether these are fit for purpose and what requirements comparison tools have that

cannot be delivered through such a market-led approach.

2.54 Combining external research on unarranged overdraft tariffs and satisfaction of

unarranged overdraft customers, with transaction data and open data on service quality

and the distribution of unarranged overdraft charges, will create the ecosystem for

financial technology firms and existing providers to develop PCA comparison and other

tools that can be personalised for unarranged overdraft customers.

ANNEX:

PAYMENT OPTIONS OFFERED BY SERVICE PROVIDERS

Figure 1: Payment methods offered by Scottish Power

Figure 2 Payment methods offered by Capital One credit card

Figure 3 Payment methods for social housing rent