No such thing as a free lunch

Financial Services Team Blog

Lynn Tweedale

There are times when I wonder whether the financial sector will ever stand up and acknowledge their mistakes.  Despite inquisitions and enquiries resulting in a CEO bowing down in apologies (before leaving the company WITH their extensive bonus), do they really recognise their part in the ongoing streak of scandals or is all this lip service?

Following the FSAs chairman labelling the current UK format for current accounts as a ‘central problem in UK retail banking’, Barclay’s new chairman Sir David Walker is alleged to have blamed the mis-selling problems, rate swaps and PPI as ‘the consequence of not charging for bank accounts.’

How can banks deciding not to charge customers possibly be the reason customers have ultimately been stung yet again?

Sir David, who will pick up the role in November, has set a 24-month deadline by which he hopes Barclays will be on firmer ground, and as part of this, he states he agrees ‘in principle’ with customers paying to use current accounts and the end of the free banking model.

The so-called ‘free-if-in-credit’ model has been predominant in the UK since around 1985, before which transaction fees were charged per service used, for example, per direct debit, per cheque or per deposit.  In an attempt to lure new customers to open current accounts in the post war era, banks competed on the most visible aspect of accounts such as monthly fees or ATM charges, which has resulted in the current situation of reducing them almost entirely down to zero.

Primarily – the term ‘free banking’ is misleading.  Customers still pay via reduced or non-existent interest rates, and if those in credit are happily taking the ‘free’ service, the banks need to cover their costs in other ways.

As discovered by consumer magazine Which? this month, some people are running up bank charges of up to £900 a year by going overdrawn, and as we’ve seen in the dark banking closet, banks like to aggressively cross-sell other products which do make money, such as payment protection insurance.
So maybe there is something in this sweeping statement – charge for accounts, and the sales staff would have less tough sales targets, and customers would all enjoy higher interest rates and a better service.  Sceptical?  Yes – me too.

But, with all this discussion, it does seem like there is a better way forward for British banking.
Whilst still a relatively small proportion of the market, one in five adults (Defaqto) is estimated to have a packaged account – an account with a monthly charge that also includes extras such as incurances or breakdown cover, yet according to uSwitch, just under a third use these benefits.

Yes – these accounts are attempting to bridge the gap in funding accounts, but the FSA is concerned many of the extras are simply not suitable for many account holders.  With new regulations being enforced from March 2013 to ensure such accounts aren’t being sold to those ineligible to claim on such packaged account ‘benefits’, could the banks be setting themselves up for yet another miss-selling slap on the wrist?

So how can the banking sector dig themselves out of the free account hole?  It would be a bold bank to do alone, but if done collectively the banks will be accused of colluding and price fixing.  Regulation is surely the only way out.  With the FSA era drawing to a close, it’s going to take a strong hand to be gutsy enough to rock the boat – perhaps this is the time for the new regulatory bodies to burst onto the stage and shine?  Free banking is a myth and needs to be dealt with!

Only time will tell, but personally, despite the logic of the pay-as-you-go account which is accepted extensively across other European countries, I think the majority of the UK public aren’t willing to see the business sense and benefits to themselves.

In the meantime – remain vigilant if you’re likely to go overdrawn, check the small print on any pushed cross-sell and heed the great British words of wisdom “look after your pennies and the pounds look after themselves.”