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The Secret of the Jars
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THE SECRET OF THE JARS: Jim Spowart
Good afternoon, Ladies and Gentlemen.
Im delighted to be here. As many of you may know, Im a passionate
Scot, and very keen on marketing, so I am always pleased to be able to
contribute to an event such as this.
Ive called my talk today THE SECRET OF THE JARS: it is really the
story of how I helped build four banks, and in particular I hope to be
able to give you some insights as to how I developed my latest venture,
Intelligent Finance. As to the relevance of jars, all will be revealed
shortly.
In addressing your theme for the day, Changing Lives, I feel Im
taking on the mantle of representing the whole banking industry. And
lets face it, this immediately puts me at something of a disadvantage.
Banking is hardly as sexy as budget airlines, or motor cars or ethical
coffee production. So you can rest assured, I know my limitations. I
will not attempt to be as sexy as some of your other speakers today.
(Some of you may think there is little chance of this happening anyway!)
But I am passionate about my industry and the interests of consumers, so
I will try to make my story as sexy as possible.
I also see Ive been given a late in the day graveyard slot: so I know
Ive got my work cut out to keep you all awake.
So if Im not going to hold your attention with the promise of a brass
band or a cabaret, how can I make a relevant contribution to your days
deliberations?
Well, lets start with a little quizimagine you all have a large sheet
of paper; you fold it over once, and then fold it over again, and then
again, until you have folded it 50 times. The question is: how tall
would you guess the thickness of the folded paper would be? A phone
book? Or less? About three foot thick? Or even as high as a
refrigerator? Or more? Now I want you to decide roughly how thick you
think it might be and remember your answer, because Ill come back to
this in a little while.
Back to banking: how is the pace of change affecting consumers?
Well it stands to reason that there must be a significant effect, after
all, financial services is so obviously a key part of the modern
consumer marketplace.
In the next few minutes I will try to give you an insight of how I feel
our industry is responding to our fast changing world. And I think you
may be interested to learn how my own thinking has altered, and
developed, in order to adjust to the pace of change youre all thinking
about today.
However, before I deal specifically with my industry, I did some
homework into how change is affecting all of us.
Now I thought I had a pretty reasonable grasp of what change means; the
global village, the information revolution, the superhighway - a
constant haze of jargon and technology. Its all become a bit of a
clich hasnt it?
However, I have to confess that I was a little shaken by what the
experts seem to be saying. I think it can be fairly well summed up by a
shape. This shape. Its a graph: a very simple graph, I call it the
graph of everything. A standard geometric progression. Wherever you
look: youll see the graph of everything.
Now, remember your piece of folding paper? How thick did you imagine it
was, when folded 50 times over? Well the answer is that the stack of
paper would approximate the distance to the sun! And of course, one more
fold and it would be the distance to the sun and back.
(Now, I know this might seem incredible; at first I didnt believe it,
but just try for yourself; youll see its impossible!) This for me is a
clear example of how a geometric progression works; extraordinary speed
in a short space of time. From a wafer thin sheet of paper all the way
to the sun.
And of course, the implication of geometric progression when applied to
all aspects of our lives is massive, almost unimaginable, accelerating
change.
Lets look at some real life examples:
Moores law, which states that computing processing power will double every 18 months. This has remained uncannily true since 1972. (This
might sound impressive, but bear in mind that weve got a long way to
gothe most sophisticated computer is still outclassed by the
processing power of the humble earth worm!)
Here are some more examples: The publication of scientific journals The growth of mobile phones The growth of the internet Airline travel Global energy consumption And world population growth
All these bound together by one constant; the pace of change, the graph
of everything.
The analogy which comes to mind for me is mountaineering.
Imagine us 30 years ago. Adapting and adjusting to our changing world
was a bit like a gentle stroll in the foothills. No problem. Easy for
all of us to cope.
In the 1990s the foothills got a bit steeper, and suddenly now, in the
21st Century, were confronted by a massive cliff-face. Its the graph of
everything.
Now the rules of the game have changed completely. No more gentle
rambling, were all expected to be expert rock-climbers. So here we are,
often clinging on by our fingertips, and one mistake, or even one single
event, and youre history. So I encourage all of you to see yourselves
as rock athletes. [Heres me as a rock athlete!]
We dont have to look too far for examples of companies that have fallen
off the cliff: Marconi, Arthur Andersen, Barings, ITV Digital; and also
companies who are struggling to cope with the new skills required;
British Airways, British Telecomthe cliff-face is a harsh unforgiving
placeand its a long way down.
The companies that are winning are the agile and swift, somehow they
manage to cope with the constantly changing challenges that lie ahead.
They are the rock athletes of todays corporate world.
I thought that Stephen Hawking might also be useful for an insight into
the future. He certainly makes some pretty scary predictions as to where
were all headed. He calculates that with the current rate of world
population growth, unless we have a dreadful nuclear war or are hit by a
meteorite, by the year 2600, thats just 600 years from now, we will all
be standing shoulder to shoulderwe will have run out of space!
Whats more he calculates that the growth of energy production means the
earth will overheat long before then!
Not a very positive outlook Im afraid; but just two simple examples of
how frightening the pace of change really is.
[SLIDE 34] Whats all this got to do with banks, I hear you think?
Well, what is clear to me is just how lacklustre our industry has been
in terms of innovation and change. Most markets are changing at a
frightening pace; but banks appear to trundle along comfortably without
too much attention paid to innovation. Were still in the foothills. Am
I being unfair?
Well lets look at the history of banking; how fast has the pace of
change really been? Here is a timeline of the significant events in
financial services and banking: We can see that many of the most
significant innovations are actually quite old: paper money was invented
by the Swedes in 1661, the overdraft by The Bank of Scotland in 1728,
the first cheques in 1780, the first printed notes in 1855, the first
credit card in 1950 and the first cash dispenser in 1967.
Although the last few years have seen some significant events, such as
phone banking in 1989 and the web in 1999, the pace of change hardly
seems dynamic.
Let me give you a practical example: when I started in banking in 1968
(The Royal Bank in Cowdenbeath) it took five working days to get a
cheque book out to a customer from the date of request. Here we are in
2002, and guess how long it takes to get a customer a chequebook? Yes,
it still takes five days.
And how do consumers feel about the pace of change? Do they feel theres
too much change, which they cant keep pace with?
We commissioned our agency, The Union, to use their world-wide network
to conduct a research survey in 15 markets around the world. We asked a
small sample (300 marketing professionals), which covered the UK,
Europe, Australia, Japan and the US, to complete a web survey on
perceptions of banking and the pace of change in various industries.
Unsurprisingly the top industries for the pace of change were
Computers/IT (98% very fast/fast), Telecoms (95% very fast/fast) and
Media/entertainment (92% very fast/fast). Banking lags behind, ahead of
Utilities, Tourism and Airlines with around 52% feeling the pace of
change was very fast/fast.
It is also disappointing to see that only 30% of the sample felt that
the standards of customer service in banking were excellent/good;
compared to 43% in Computers/IT. Banks are only ahead of Airlines,
Telecoms and, finally Utilities, who rated only 12%.
So, I hope Ive established that our industry, with a few notable
exceptions, is hardly a shining example of innovation and rapid change
benefiting the consumer. Why is this?
As I said, I started in banking over 30 years ago, so I think this
qualifies me to give you some general, and perhaps controversial,
conclusions as to why the world of banking has been so resistant to
change.
I think the most fundamental reason is that there has been little real
competition amongst banks. Until recently, there were massive barriers
to entry; starting a new bank is hardly a simple task.
The big four basically operated a cartel, and were comfortable to take
around 25% share of the market each. This lack of competition began to
change with the introduction of the building societies as challengers in
the late 80s. The recent merger of Halifax and Bank of Scotland,
creating HBOS as the fifth force in banking, is the first serious
challenge the big four have experienced for some time.
This lack of competition, which has allowed the banks to build massive
businesses, has created an historical complacency. And this complacency
has translated into practices and attitudes which, to me, seem to place
the consumer last. Youre all consumers, how do you really feel about
banks?
It never surprises me that in all these brand surveys I see, banks never
feature: its always brands like Coke, Boots and Heinz that consumers
relate to. Funny really, youd think that your bank should be more
central to your life than a tin of beans!
To me this just underlines the fact that banks have never really had to
build brands.
For example it is well known that a sizeable percentage of the customer
base of the big four is constantly moving, or churning, from one bank to
the next. So the exercise of consumer power is meaningless; because
whilst one of the big four might lose a customer through bad service, it
can relax safe in the knowledge that another fed up customer will turn
up from one of the other three banks!
For those of you who think Im being unfair; Ive put together a little
tape to show you some of the worst historical practices in our industry;
and Im ashamed to say that much of this still goes on today. Ive
called it the banking chamber of horrors; and its my top worst
banking practices; where I believe the customer is getting a raw deal.
[Itll also probably get me into a lot of trouble, thats why I havent
named names.]
PLAY VIDEO: Vincent Price
OK, so I may have exaggerated to make a point: but all of these things
do happen; go and check with your own bank tomorrow.
But there is some good news on the horizon. Change is on its way, for a
variety of reasons. Why is this?
Well first, we are starting to get real competition: building societies
have become banks; the phone and the internet have created viable low
cost channels to market, and new brands like Virgin, Egg and Cahoot, and
the supermarket banks are on the scene. International competition is
also here; with operators like Citibank, MBNA and Amex very active in
the UK.
Second, the government is no longer prepared to stand by and let anti-
competitive practices persist, which is why there have been recent
enquiries into retail banking, and business banking; and now credit
cards are under the spotlight.
Third, consumers have wider access to information. Even tabloids now
have financial sections. As a result consumers are less pliable and less
willing to put up with second rate service and second rate value.
Pressure groups, consumer associations, and trade bodies are also much
more vocal.
Fourthly, the same powerful media, which can be quite unforgiving to
those banks who transgress, keeps the industry focused on delivering
value.
And last, the most obvious change: technology is finally being harnessed
not just to deliver cost efficiency for banks; but also to deliver real
consumer benefits in terms of access, control and speed.
Technology also drives product innovation; for example, our Intelligent
Finance concept would simply not have been possible just 5 years ago.
The combination of all these factors does mean that our industry is
having to wake up, and finally I do think, just in the last couple
years, the consumer is starting to come first.
Now I cant claim to be the only person to put the needs of the consumer
central in our service; but I did have a massive advantage when the
Halifax approached me and asked me to create a stand alone internet
bank.
Quite simply I was able to start with a blank sheet of paper. So I had
no legacy systems, no historical practices, no established culture; I
was able to sit down and dream up my perfect bank. And I think this is
key to our success.
Often those innovations which are best adapted to todays world, given
the pace of change, are those which reject the worst from the past; and
have the clear sightedness to start again. In a sense I think this is
what Go and the low fare operators have achieved with air travel, I
would also put innovators like Microsoft, Carphone Warehouse and Tom
Farmers Kwik Fit in the same category.
I had another huge advantage: it was the third time I was setting up a
bank. I dont know if Im unique in this respect, but it certainly gave
me a wealth of experience to draw on and a fantastic team of hard bitten
banking veterans around me.
The first time it was under the Direct Line brand, when I was asked by
Peter Wood to set up Direct Line Financial Services, second time it was
for Standard Life where I created Standard Life Bank.
One thing both these operations taught me was the importance of the
telephone; as both were very successful phone operations.
I can confess to you that the internet is not something I was that used
to, nor was I that convinced it would be a big driver for any new
business. [I was sufficiently cynical not to get carried away by the dot
com hype.]
Thats why I insisted to the Halifax that we had a phone operation at
the heart of Intelligent Finance. Indeed our fact finding mission to the
US in late 1999 showed us that the most successful web operators, like
Charles Schwab and Citibank, were using the phone to provide service and
back up and make the web more efficient.
So when I set out to build Intelligent Finance I had the consumer
central in my thoughts, and I was determined that my new bank would be a
Consumer Champion.
So the team and I decided, if we could change the rules, we would:
In the end we did away with a lot of the old practices:
No unwarranted redemption penalties on mortgages. No seductive cheap offers like 0% on credit cards. No loss leading rates on savings. We dont apply the Rule of 78, or charge redemption penalties, on our
loans.
We dont use risk pricing; everyone gets the same treatment no matter how much, or how little, they borrow.
We offer mortgages on ability to pay, not multiples of salary. We calculate interest on daily balances, as we think thats the
fairest way.
And fundamentally, which is core to the unique concept we created, we dont charge our customers for borrowing their own money. This is our
offsetting concept, where any credit balances a customer holds are
offset against any debt. This way, the consumer gets no interest on
their credit balance; but the good news is that they pay no interest
on the same amount of their borrowings.
Now I know that this concept may not seem totally new to you, and it
certainly isnt these days. But the way I conceived our product was, and
still is, unique, in that the customer can keep all their money
separate, but link it together for calculation of interest.
Call me old fashioned, but thats how I like to keep my money.
Right from the start, I used the analogy of keeping money in jars;
thats why youll find jars used on our website and in our legal terms
and conditions. Believe it or not, it was the simple analogy of jars
that helped me visualise the concept, and sell it in to the Halifax; so
thats what the secret of the jars is all about!
For me, our system is perfection in banking; and we are still the only
bank where people can have all or any of our five banking products kept
separate, but still linked together for interest purposes; theres no
sweeping required.
[You may have read that we have a Patent application pending to protect
our software and our system from imitators.]
[SLIDE 61] To our core concept we then added the access of phone
banking, web banking, a simple 6 minute mortgage application, the
facility to see all your money and finances on-line, and unrivalled
flexibility; for example the ability to link your current account to
your savings and automatically get savings rates on both. If you save
and borrow with us you can also choose to receive borrowing rates on
savings rather than reduce the cost of your borrowings. No other bank
offers this.
Absolutely everything we did was based on what the customer told us they
wanted.
Marketing was central to our development right from the start. The
product development, led by my Marketing Director Angela McIntosh, and
conducted with our agency The Union, came back with one glaring
observation: we were doing everything the consumer wanted; but they were
so cynical about banks that they simply felt it was too good to be
true! This subsequently gave us headaches with the communication: but
nevertheless, it gave us massive confidence that we were onto a winner.
The Union came up with our name: Intelligent Finance, because it
describes perfectly our product, if.com because it is beautifully
simple, [and I and F happen to be at the centre of Halifax.
(Interestingly, they also happen to be at the centre of FIFE, which,
coming from Cowdenbeath, appeals to me greatly!). We decided on the
colour purple because we wanted to be unique and stand out from the
crowd; no other UK bank used purple at the time. I know we have a
powerful brand equity tied up in our name, and this has helped
enormously to accelerate our growth.
As an aside, I am also a passionate believer that those Scottish based
clients who look to London should take a careful look at the creative
talent available on our doorstep; the service and quality we get from
using Scottish agencies like The Union, Northcross and Navigator is
difficult to beat.
You may remember we launched the phone bank in September 2000, and then
the web bank in November 2000; and fortunately weve never looked back
since. (Incidentally, the fourth bank we created was St James Place
Bank, which operates off the same software platform, but is a stand
alone Private Bank.)
Weve all put in a massive amount of effort and work to get our systems,
customer service, and marketing right; and so far the results have
surpassed even my best estimates.
Our success is perhaps not that surprising; when you consider how the
features of our system translate into real consumer benefits. Apart from
the obvious benefits of control, access and speed through phone and web
banking, here are some examples of the value we give back to the
customer:
Even without the benefits of our very competitive rates, the effect of our offsetting concept delivers the average consumer a saving of up to
1000 a year compared with not linking our accounts together; this is
for someone holding our average product balances.
Offsetting also can save a typical customer 10,000 on their mortgage,
and theyll pay it off earlier. Some customers can save a lot more, up
to 30,000.
Offsetting also means you can pay no interest on a loan or credit card, assuming you have some savings.
Theres also a tax benefit if you offset your savings, we cleared this
specifically with the Inland Revenue.
And our Current Account gives customers 30 times more interest compared with the high street banks, and 40 times more if you have a
savings account as well!
Im a great believer that if you look after the customer, the customer
looks after you. And that is what I think has happened with Intelligent
Finance. Weve had a phenomenal 18 months. For example, this is what we
achieved by the end of our first full year:
We took 9% of the net UK mortgage market; thats 8.9 billion of
balances in hand and forecast to complete.
We were then up to 327,000 accounts and our customers hold in excess of 2 products with us. (Bear in mind that the industry average is
1.3).
We had lent over 270 million in personal loans. Our savings and current account balances were over 2 billion. We now employ 2000 people at three sites in Edinburgh and Livingston,
and were opening a new call centre in Rosyth, where we will employ
800 people. Were also the largest telenet call centre operation in
Europe.
I cant give you any more up to date figures for City reasons, however I
can tell you that our growth this year certainly hasnt slowed!
Now I know that some in the banking establishment in Scotland assume
that the growth Ive achieved is all down to loss leading rates. Let me
set the record straight. None of our rates are loss leading; we make
margin on all our products; were not about giving it away, like some
other new entrants have done.
Intelligent Finance is on target to breakeven by the end of 2003. We are
now the fastest growing new generation bank in the UK and set to become
a major UK player.
In asset terms were bigger than EGG, SMILE, VIRGIN and CAHOOT.
Weve won 11 industry awards so far, and my intelligence tells me there
are more to come!
I cant finish without giving a plug to my PR team led by Heather Scott.
In 2001 Intelligent Finance generated a massive amount of positive press
coverage, in fact and we were 8th out of 2921 UK companies! Not bad for a
brand new bank and a fantastic achievement by our team.
Thats the story so far. I hope my story of starting with a blank sheet
of paper, informed by my experiences at Direct Line and Standard Life
Bank has been of interest. More importantly, I hope that our
determination to be a Consumer Champion, (together with the secret of my
jam jars), and the success weve had as a result, inspires many of you
to take a fresh approach in your own industries.
To finish off my tale, here is a short video of some of our customers
talking about Intelligent Finance.
[SELECTION OF TESTIMONIALS VIDEO.]
And where to next? Well theres no doubt that if we are to continue to
scale the cliff-face, we going to have to keep innovating and investing.
Others are now copying us, we are largely responsible for creating a
sector. When we launched, this is how many were offering integrated or
offset banking; and this is the picture today. This is certainly good
news for the consumer, and a challenge to the status quo.
But it is also a challenge for us to stay ahead of the game. So we are
working on many product and service improvements, and looking at new
markets to enter. Watch this space.
And where will banking be in the future? Its a big question; and very
difficult to predict; but internet and phone banking will certainly
become the norm, [for example it is estimated that over 3000 banks
worldwide already offer services over the web] but one thing I do know,
and its that our integrated offset banking concept will be the norm,
and as a result banks will no longer be taking consumers for granted.
Our claim the way all banks will be might have sounded like an
advertising boast a few years ago; however I firmly believe we are the
shape of the future, and very soon all major UK banks will offer a
version of our concept.
Thank you for you patience. As you can probably detect, Im passionate
about banking, marketing, and Intelligent Finance, but most of all, the
interests of the consumer.
Ive very much enjoyed sharing my story with you.
And finally, good luck with your rock climbing.