Would customers benefit from the end of free banking?
Tuesday, 06 December 2011 11:03
By Kate Saines
Picture the scene. You need to open a bank account, just a current account to have your wages paid into and direct debits and bills paid out of.
So, you visit your local branch of Friendly Bank plc, open a basic account, give your details, provide the usual identification to prove you are who you say you are before depositing some cash to start you off.
Then the very friendly cashier turns to you and says, “thank you very much, that will be £129.99, please”.
It’s probably very safe to say most of us would be shocked to say the least. Let’s face it, if we knew the cost beforehand we would have given the Friendly Bank a wide berth.
But while this scenario might appear ludicrous it is not a world away – some may argue – from the situation many of us could be in if the ‘free banking’ system we enjoy at the moment were to be abolished.
And, many will argue, it is probably a far more honest version of the situation we are currently in where many of us are paying for our bank accounts without realising.
Okay, we might not hand over a lump sum to pay for the pleasure of opening an account -unless we own a packaged account with a raft of perks attached. But many of us do end up forking out for a range of charges, fees and additional products during our time as banking account customers, which is the equivalent of paying for the service.
And this, in a nutshell, is the very primitive form of one of the arguments at the heart of the free banking debate which stepped up a gear recently when a senior figure in the Financial Services Authority (FSA) suggested there was no such thing as free banking.
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In fact, Andrew Bailey, the FSA’s director of banks and building societies, said the fact customers thought banking was free was at the root of the various mis-selling scandals which have rocked the nation’s banks over the last few years.
Mr Bailey, speaking at the Future of Retail Banking Conference in London, said: “There is of course no such thing as free banking.
“What it really stands for is that charges are levied inconsistently across products supplied by banks, with the consequence that some appear to be free.”
“It also leads to what in my view are unhelpful and damaging decisions on the supply of products,” he continued.
“The philosophy should be, give the public what they want but at a fair price which is transparent to them.”
Mr Bailey, is clearly on the side of the debate which believes instead of subtly secreting money out of customers by charging hefty overdraft fees and using sales staff to sign them up to payment protection insurance (PPI) when they take out a loan – banks should just ask for money up front.
It’s this viewpoint which favours banks charging all customers in a candid, open way instead of penalising those who have debts or have been sold products unnecessarily with fees and charges.
Mr Bailey also said in the speech that in the run up to the credit crunch not only were margins on mortgage lending squeezed but banks were ‘earning returns from opaque fees’.
He added: “The business model of squeezed lending margins and mis-sold products, whether it be PPI or mortgage products, was wholly undesirable.”
But there is, of course, another side to this debate. And that is by abolishing free-banking as we know it those people who run their finances without falling into uncontrollable debt or who do not buy unsuitable products are suddenly being penalised.
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However, evidence would suggest many more of us are paying for our bank accounts than first realised.
And this is thanks to the rise in the number of packaged accounts being opened – not always with complete understanding from the customer of what they are paying for.
An investigation by independent financial research company Defaqto found there are now more packaged accounts available than free in-credit accounts with the number now standing at 69 compared to 33 in 2006.
The average monthly fee for packaged accounts, Defaqto discovered, has increased over this five year period from £11.59 to £15.44. This means the average packaged account customer is paying £185 per year.
The problem with these accounts is, unless you use the benefits available with these accounts you are effectively paying the bank for the pleasure of simply holding a bank account.
A separate investigation by Which? found a third of people do not use any of the benefits they are paying for in their packaged accounts.
Richard Lloyd, executive director of Which?, said: “This means they’re wasting between £240 million and £320 million in bank fees each year.”
And he added: “Banks have a responsibility to make packaged accounts more transparent by clearly explaining what each of the individual elements are worth, so customers can compare.”
Consumer Focus meanwhile went as far as to reveal it had raised concerns to the FSA that many consumers may have been mis-sold packaged accounts and were paying for extras they did not use or need.
Sarah Brooks, director of financial services at the consumer group, said: “The last thing this market needs is another mis-selling scandal following on from PPI. Consumers need to be able to trust banks to sell them products that are right for them.
“They need good advice and customer service.”
Read more: The best savings accounts to help your money grow
There is another argument too. The fact that it is currently impossible to ascertain before opening a bank account what charges, fees and other sundries customers will be landed with makes it difficult to compare accounts.
And this makes switching to better accounts tricky too.
The Treasury Committee published a report in April highlighting this very point. Andrew Tyrie, committee chairman, said: “For competition to be effective, customers need to know what they are buying, how much they are paying and to be able to transfer their custom from one provider to another without risk.”
The committee called on the government to do more to prioritise competition in the way it regulated the industry and asked the banks to co-operate with this.
But it also backed Andrew Bailey’s view that ‘so-called free banking is not free’. The Treasury Committee said a minority of customers – usually those on low incomes – were paying explicit charges associated with overdrafts which resulted in high prices and poor outcomes for them.
Meanwhile other consumers, those who tended to be on higher incomes, did not pay explicitly for their current account provision.
It effectively suggested there was an element of cross subsidy occurring and used the airline industry as an analogy with which to compare this.
The committee said the customers who booked early were crossed-subsidised by those who booked later. Yet pricing in this industry was far more transparent and customers could easily switch airline provider – unlike the banking world where cross subsidy was opaque and switching costs were high.
So the question, it would seem, is not necessarily are we about to see the end of free banking but has free banking already come to an end?
The regulators appear to be convinced that an upfront charge would be far beneficial to overdraft fees and similar methods for the banks to claw back much-needed funds.
But whether or not this would be cheaper overall for us the customers is another matter.
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