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.