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Banking in Scotland
Chapter II - Banker and Customer

The Modern day relationship between banker and customer is now exceedingly complex but in the early days of banking it was very simple, for in those days the range of services offered to customers was limited.

Banks at first existed to advance money by issuing notes, so a customer who had borrowed on cash account, for example, was a simple debtor of the bank and of course the converse of this was that the bank was the customer's creditor. The early banks were also involved in the remittance business so that if a customer of the Perth United Bank in 1766 had to make payment in Edinburgh and London he would go to his banker and buy a bill drawn on the bank's correspondent bank in Edinburgh or London which he would then send to his creditor for payment. In many cases where the transaction was straightforward the nature of the business was simply that of purchase and sale. The bank would of course make a small charge for this service. If, however, the bank lent the money to buy the bill—a very common occurrence—then the relationship between banker and customer would again be the very simple one of debtor and creditor.

Although not unknown in the first half of the 18th century the practice of deposit taking did not become commonplace until the second half of the century when deposit receipts (interest receipts) and credit balances on cash credit accounts became standard practice at first in the Glasgow, Dundee and Edinburgh areas but soon spreading to the rest of the country. In these cases where customers held deposits in their banks the balances were liabilities of the banks and therefore the customer was the bank's creditor and the bank was the customer's debtor. It was, in short, still a very simple relationship.

In the 18th century banks did very little for their customers other than accept their deposits and advance money (notes) by discounting bills or opening cash accounts. There is, however, some evidence to suggest that the relationship between banker and customer was sometimes a little more complex than the straightforward one of debtor and creditor. For example there are a few examples in the archives of banks arranging to purchase Government securities in London on behalf of their customers. In these cases the purchases were made by the bank's London correspondents and the relationship between banker and customer was that the bank was the agent and the customer was the principal. This was further complicated by the correspondent bank in London being a sub-agent in the proceedings. Such business as this, however, was not common. Also there are some examples of banks collecting payment, again through their correspondents in London, of bills held by their customers. The normal practice of course was for banks to discount these bills and then collect them on their own behalf but occasionally they collected these bills as agents for their customers. The reason for this deviation from normal practice was never made clear but it is possible that the bank might have a poor credit opinion of the person upon whom the bill was drawn, the payer, and did not wish to run the risk of a bad debt by discounting the bill. Whatever the reason this practice was far from common.

The extension of branch networks in the 18th century expanded the opportunities for remittance business but this was simply between head office and branch or between branches. The 19th century, however, brought great advances in the development of branches not just in Scotland but as the Scottish system of banking was adopted in England and Ireland arrangements were entered into where banks, head offices and branches, could draw bills on the head offices and branches of other banks elsewhere in the British Isles. The development of this service has been much under-rated as a contribution to economic growth. It now seems clear, however, that the provision of this extensive service encouraged businessmen to sell their goods to a wider market, i.e., a national market, because now they could obtain payment easily through the banking system. Before then businessmen had to make complex arrangements usually involving bills drawn on London to obtain settlements for sales made outwith their local areas. Now a Perthshire linen manufacturer could be more confident about making sales in Co. Cork or Cornwall because the facilities existed whereby he could obtain payment for his sales through the banking system.

This extension of facilities also acquired an international dimension so that settlements could be made across national boundaries. In the 18th century this service was very limited. Payments were usually achieved through the London money market by means of bills of exchange. A service sometimes offered by banks was the letter of credit which was drawn in favour of a customer usually travelling on the continent and which entitled him to draw bills either on his bank in Scotland or on its London correspondent and have these discounted for cash. This was the fore-runner of the traveller's cheque but the irrevocable letter of credit is still used internationally for the settlement of debts.

The refinement and development of these methods of international settlement in the 19th century reflected the growing importance of overseas trade particularly after 1830 and the growth of the railways and steamship services. One of the main barriers to international trade was that a seller in one country might find a buyer in another country but the buyer might wish a period of trade credit before paying for his purchases. The seller might be reluctant to offer this facility because he had no way of judging the credit worthiness of his customer. To overcome this problem banks helped in several ways. First they could obtain credit references on overseas businessmen via overseas banks. Secondly, they could arrange some acceptance finance, i.e., they could put their own name on a bill of exchange thus guaranteeing payment when the bill fell due. Thirdly, they could arrange some other form of guarantee which would ensure that payment would be made. This usually took the form of a documentary credit. The practices concerning these credits were eventually standardised by the International Chamber of Commerce in a document entitled "Uniform Customs and Practice for Documentary Credits".

Some of the early arrangements to finance foreign trade were exceptionally complex. For example one such agreement from the archives of the Union Bank in 1853 was established for a customer who was a merchant heavily involved in international trade.

"The credit to be a running one terminable after four months warning from either party each advance to be payable at the expiration of six months from the date of deposit by bills of exchange endorsed by their New York house drawn by (first) Dennistoun, Wood and Co., or A Dennistoun and Co., or the Liverpool Borough Bank, (second) by Bank of British North America, (third) Brown Brothers and Co. or Brown, Shipley and Co., (fourth) M Morgan or Overend, Gurney and Co., (fifth) by Duncan Sherman and Co. or George Peabody and Co. or Union Bank of London, or such others as shall from time to time be approved of by the bank, their bills deposited being returned to them on the bills of exchange being placed in the hands of the Bank's agent."

The sheer scope of this agreement is indicative of a highly developed international network of financial intermediation and also of a willingness on the part of banks to go to considerable lengths in the setting up of correspondences with other banks in an attempt to meet the financial requirements of their customers. What is clear in all this is that there was a conscious effort on the part of the bankers to respond to the needs and wishes of their customers. Without that response from the bankers Britain's economic development would have been greatly hindered. In this sense the role of the banks in economic development must be seen to have been directly growth inducing.

But if progress was being made in the development of international services for customers there were also great strides being made in the growth of domestic services. In particular this period witnessed the increasing use and importance of the cheque. Because of the great importance of bank notes in the history of Scottish banking the use of cheques was slow to develop—certainly slower than it was in England where for many years £1 notes were forbidden. The idea of the cheque had been around for some time but in the 18th century it seems to have consisted largely of an instrument which instructed a banker to pay cash from a bank account to a third party but even in this form it was not extensively used. Nearly all local payments were settled in bank notes and the notion that cheques could be used for payments without the use of bank notes seems to have been resisted for many years. The practice of settling debts by cheque seems to have crept in in the 1830s but although the evidence is scanty most commentators suggest that the Scots businessman usually drew one cheque per day for cash which he then used to settle his accounts. Some bankers urged the London practice of settling money transactions directly by cheque and the practice gained support—so much so that in 1865 it was necessary to set up a cheque clearing system in Edinburgh to complement the note exchange which had been established almost 100 years earlier. At this time the Scots had just begun to open offices in London but when they applied for membership of the London Clearing House this was refused. Ironically when they were invited to join in the 1970s they declined arguing that the expense involved was not justified by any benefits which might accrue to the banks and their customers as a result of their membership.

The emergence of a chequeing system, however, brought banker and customer into closer contact for the banks then had to evolve a system of practice to deal with the clearing of cheques and the whole host of legal problems which the cheque system brought in its wake. For example bankers had to learn how to deal with the problems of insufficient funds to meet payments, stopped cheques, incomplete (inchoate) cheques, attachment of funds and inter-bank settlements. Fortunately many of the problems fell neatly into existing legal provisions governing bills of exchange although it was necessary to codify this legislation and case law in the Bills of Exchange Act of 1882. This Act was curiously misnamed for its real intent and purpose was to bring order to cheques rather than bills which were, by then, declining in popularity. When further legislation was required to standardise and simplify practice in 1957 the legislation which was passed was called the Cheques Act 1957 which reflected the fact that cheques had far outstripped bills of exchange in common use. Bills of exchange staged something of a comeback in the finance of foreign trade in the 1970s but the number of bills current at any time is tiny compared with the number of cheques.

The emergence of the cheque system has ensured that the relationship between banker and customer has become much more intimate than it was when customers simply drew notes from their banker when they needed cash. It has, however, also created problems for the costs to the banker of operating the chequeing system are far greater than those involved in the cash society. This has raised in the bankers minds the question of how to levy an appropriate charge for the service provided and how much to charge. One way round this problem was to stop paying interest on current accounts and this was adopted in 1892 but as the system developed it was found that this was still insufficient to cover the costs of operating the system and in any case it did not operate very fairly. Various charges were subsequently levied by the banks, e.g., 6d per debit entry from 1961 but heightened intensity of competition in banking in the 1970s coupled with increasing consumer-ist pressures had given rise to a situation where most personal current account customers pay no charges in their current accounts. Some banks stipulate that customers should maintain a certain minimum balance in their accounts—usually £50 while others require only that customers should keep their accounts in credit to secure free banking services. The effect of this was that customers paid less for their current accounts in the 1970s than in the 1960s. Charges continued to be levied on business accounts.

A further development from the current account came in 1961 when the credit transfer system was introduced. This enabled payments to be made by a person at a bank (not necessarily a customer) into an account at another bank. It was a much more direct transfer than the cheque which involved the drawer in postages. The credit transfer system caught on quickly and proved to be of great service in the paying of bills and in the evolution of the standing (banker's) order system (subsequently direct debits) where customers can make regular payments from their accounts for such things as life assurance premiums and mortgages without involving themselves in anything other than an initial written instruction to the banker. The development of this system further narrowed the gap between banker and customer. It ensured that bankers became much more aware of the individual needs of their customers.

The quest for more extensive and efficient payments, however, has not ended for all systems have now been computerised and bankers are now experimenting with various systems of electronic funds transfer which will greatly reduce the need for paperwork in the banking system and may reduce charges to customers even further.

These developments in the 1960s and 1970s are, however, indicative of a greater change in the relationship between banker and customer. In effect what banks have been seeking is a new image—an image which will attract customers and hold them.

For much of the 20th century the banks had projected an image to their customers which was both formal and to some extent remote. In a real sense this image was also reflected in the other professions of accountancy, law and insurance. It was an image which conveyed a

sense of continuity and stability and was intended to foster confidence in the system. By the late 1950s, however, the whole mood of society was changing in favour of more informality in personal relationships and this changing mood percolated into the business world. Especially it affected the professions of banking and insurance more than accountancy and law for the former depended on a mass market while the latter did not.

The emergence of this consumer society led the banks to change their image.

"Much thought was given by the banks to their visual projection in terms of architecture, stationery and literature, all with the object of breaking down the old marble and mahogany image with its suggestions of remoteness and formality." (S. G. Checkland)

The changes introduced were both radical and rapid. The banks all introduced corporate identity systems and house symbols. There followed a re-furbishment of branches which often involved rebuilding from the shell inwards. Everything was done to make the new offices attractive both to staff and customers—carpets replaced stone and marble floorcoverings and pastel wall coverings took the place of whitewash. To a large extent these changes were prompted by the increasing growth consciousness of the business world and the realisation that the simplest way to growth was to attract more custom. Market research and internal research revealed that less than one in five of the adult population in Scotland had a bank account. If growth was to be the primary objective then it was clear that there was tremendous growth potential in the four-fifths of the population which did not have bank accounts.

Accordingly the range of services offered by the banks was increased substantially and all services were promoted by vigorous advertising campaigns. Until then advertising had been a very perfunctory effort at promoting the name of a bank but it was soon transformed into a highly specialised and effective genre designed to promote not just a bank's name but its special services. The National Commercial and British Linen led the way into television advertising in the mid-1960s—some ten years after it had become available. The banks, however, soon made up for lost time and by the early 1960s all the banks had public relations and marketing officers and these activities were extended so that whole departments were required to perform these tasks.

As all banks, and other financial institutions too, were upgrading their images it was inevitable that the degree of competition amongst banks would become more intense. As all banks strove to bank the unbanked and maintain their existing customers the system as a whole became much more responsive to the needs of customers. The extent of this competition can be seen in the degree to which banks copied their rival's innovations, e.g., when the Bank of Scotland began to offer insurance services in 1970 it was only a matter of months before the other banks followed suit. No bank could afford to be left behind in the search for new services and new business. The result was a considerable extension of the range of services which customers came to rely on their banks to provide.

The degree of competition in banking was further intensified in 1971 when the Government, as a result of its document "Competition and Credit Control" made the banks abandon their agreements on rates and charges. The banks could then levy what interest rates they wished although the degree of competition ensured that although rates might vary from bank to bank they never differed radically. There was, however, much more scope for different charges for services and part of the result of this were the developments in current account charges outlined above.

More generally this heightened competition amongst the banks and the new image cultivated by them has resulted in a relationship between banker and customer which is a good deal more complex than that which prevailed in the early days of banking when the range of services provided was so very narrow compared with what it is today. What is especially clear in all this is that the bankers have exhibited a marked degree of entrepreneurial response to the challenge of a changing market place.

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