BLOG: The end of free banking in the UK?
Many in the UK have been brought up under the illusion that the nation enjoys ‘free banking’, although you must, of course, stay in the black.
In truth, cross-subsidies have always applied and the handsome interest rate charged on a personal loan or credit card should well cover the typical £30 annual cost of running a current account. The fixed rates which now apply to all consumer borrowing are immune to the record period of low base rates and miserly returns on savings accounts.
A free current account is not, therefore, as generous as it may seem and banks can also deflect criticism of their prevailing interest rates by raising the ‘free banking’ on offer! Many customers have already succumbed to a packaged current account with a monthly charge which bank strategists will see as the start of a slippery slope.
However, the days of traditional ‘free banking’ are coming to a close. In the dying days of the last European Parliament, a new Payment Accounts Directive (PAD) emerged on the statute book which Member States must transpose into their national law by mid-2016.
PAD includes a guarantee that all EU citizens can open a basic bank account, with full payments functionality, irrespective of their credit record. Such accounts have been available in the UK free of charge since 2010 but they are not widely promoted as the lack of available overdraft make them unprofitable for banks to run. Under PAD, Member States give banks the option to raise ‘reasonable’ charges for the operation of basic bank accounts.
With 3m people ‘unbanked’ in the UK many with a chequered credit history, undoubtedly there will be demands to introduce bank charges to counter the increased cost of account provision and the greater risk of fraud losses.
PAD also calls for state-run comparison websites. Customers in all but a few EU countries pay bank charges on their current accounts. A cost comparison website in the UK with information riddled with cross-subsidies makes no sense. The Treasury Select Committee has already declared its support for introducing bank charges and full transparency to enable consumers to make cost comparisons and an informed choice. Furthermore, new MIF (Multilateral Interchange Fees) regulation will shortly cap the fees that the industry can charge businesses for processing credit and debit card payments creating a serious shortfall in non-interest revenue.
A step change in pricing strategy is inevitable, especially with the advent of challenger banks. The days of cross-subsidies and the myth of free banking for current accounts will soon be over. One last thought: PPI is the world’s biggest mis-selling scandal – if ‘free banking’ had not existed in the UK, would bank staff have been so keen to exploit the sale of a questionable insurance policy?
Roger Davies is principle consultant at the EA Change Group.