Much has been made in the media recently about the monetary cost of “free banking”. In no short part thanks to a critical report by the consumer champion which? . Their report highlights that customer’s going overdrawn for two days per month without permission can end up paying between £120 and a massive £900 per year. The report elaborates on this explaining even customers who keep within their agreed overdraft limits can still face hefty charges and there is even an inherent cost for those customers staying in credit.

Unfortunately, despite the commonality and ubiquity of basic banking services, comparing the true cost of current accounts between providers is not straightforward. Certainly it is much less so than shopping around for the cheapest insurance, utility provider or the best value savings account.  This is because underneath the headline values of credit, debit rates and charges, there are a plethora of complex fees and charge variations that only apply in certain circumstances. For example charges for use of an ATM abroad, or to make online non-sterling purchases, and charges that might be incurred linked to terms and condition such as the turnover on your account.

Add in the complexities of “buffers”, penalty fees and charge caps and it’s not surprising that many people find making a true comparison between banks difficult. Others mistakenly believing that all banks are pretty much the same (or perhaps as bad as each other).  This is where I beg to differ, and as the (proud) owner of several current accounts, I know that while the basic facilities are common, the range and quality of branch, telephone and particularly on-line services can differ considerably.  I should perhaps declare an interest; IPL has been helping provide on-line and telephone banking services for many years and has recently redesigned and built one high-street providers’ on-line bank.

All providers are trying hard to persuade (one might even say bribe) consumers into moving their main current account to them. Incentives vary from a straightforward one-off cash-back reward to the provision of free “value add” services such as complementary travel insurance.

I fear that the complexities may increase as Banks compete even harder for new customers with the introduction of the improved “current account switching service” mandated by the regulator. This is to be introduced next year, as a response to the Independent Commission on Banking’s call to increase competition,  and to make account switching faster and easier for consumers. While I’d challenge the banks themselves to make their charges clearer, I feel that the comparison sites could also rise to the challenge of making comparisons easier.  Ultimately this will not be possible unless the banks simplify their charging structures, something that seems at odds with the industry’s current direction.

So far (and in most of the media articles on this subject) nothing has been said about the somewhat counter-intuitive cost that the current business model has on the banks themselves. The consumer has little knowledge of the true costs of providing banking services – which are considerable. Banks must provide a reliable service, and as I’ve previously pointed out, payments services are an essential element in all of our lives underpinning the UK and wider global economy.  The consumer is rightly quick to cry foul when things go wrong, recent events at NatWest/RBS being a particularly poignant case in point. To provide a reliable service requires continual investment in infrastructure and technology – not to mention security (anti-fraud), staffing, ATM, branch, call centre, scheme and regulatory amongst many other costs.

Like any business, banks need to turn an honest profit, so they must cover these costs. All the banks were quick to follow the Midland with the scrapping of charges for customers who remained in credit in a bid to gain market share (back in 1984).  Ever since, the banks have tweaked their charging models to drive revenue from customers while outwardly providing a free service. It is not surprising therefore that many consumers see these charges as unfair or underhand.  They also arguably fall on the segment of society least able to pay – i.e. those who are often already struggling financially. I’m sure such thoughts were at the forefront of the regulator Andrew Bailey’s calls for an end to free banking.  Although his comments were (perhaps predictably) poorly received by the press.

Pundits have also argued that the free banking model has contributed to the miss-selling scandals as banks used revenues from other products to cross-subsidise “loss making” current accounts.

I can’t personally see how any bank could make a break from the “free” model. To do so unilaterally would lose significant customer share to competitors providing “free banking”, and if all providers were to do so at the same time, the regulators would rightly investigate cartel like behaviour.

I’m not aware that anyone has flagged another cost to the banks in their “free” model.  As mentioned above, a significant number of customers think the (complex) charges are unfair, hidden and/or disproportionate  (Which? reported 62%).  Additionally, a massive 94% think banks should be more transparent in their charging mechanisms.   I’d argue there is a significant cost to the banks in a massive loss of trust by their customers.

Arguably this has been of little consequence while on a level playing field offering little real choice; the “they’re all as bad as each other” perception. But consider the following future scenario:

1. the new quick and simple account switching service is up and running, and has been championed by consumer groups;
2. alternative providers are offering fair and transparent  products  (which  I’d argue would have to be inherently simple to ensure that they’re easily understood).

Perhaps this isn’t too distant a scenario! So perhaps the banks had better watch out?

Tags: Bank Charges, Banking, Consumer, Current Accounts, Finance, Free Banking, Packaged Current Account

This entry was posted on Monday, November 12th, 2012 at 5:01 pm by Jason Woodfield and is filed under Banking & Finance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.