The UK is one of the only countries in the world that persists with the free banking model. But with paid current accounts, such as Santander 123, gaining attention, how long will this model continue to exist? Is there even such a thing as free banking on the high street for consumers? John Lunn argues
Banks are still suffering the fall out from the financial crisis and the latest scandal never seems far from the headlines.
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Whether it’s PPI mis-selling or Libor rate-rigging, banks’ reputations continue to take a battering in the court of public opinion.
So it seems unlikely that any bank that decided to introduce charges for all its accounts would see a stampede of customers signing up, quite the opposite in fact.
It seems counter-intuitive, but were banks to charge for their accounts it would actually make their services more transparent.
Currently they have to recoup losses from providing free accounts from other areas and services, such as charging for overdrafts.
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By GlobalDataIf we all paid a fee for our accounts, we would be able to choose the level of service we were willing to pay for and have total clarity about what we get for our money.
It would also allow customers to earn a fair level of interest; consumer advice organisation Which? estimates that customers miss out on £9bn ($13.6bn) a year in fees and lost interest.
Fees for accounts would promote competition by making it easier for people to compare accounts to find the deal that best suits them and would also potentially mitigate the risk of mis-selling.
Resistance from consumers
But abolishing the free banking model comes with some big drawbacks, not least the risk of consumers seeing it as yet another attempt for banks to get more of their hard earned cash.
There is also some cynicism around whether it would stop banks using unfair charges or mis-selling as they could introduce new fees or commission structures for employees.
Perhaps most importantly, it is a legal requirement for employers to pay salaries into a bank account so charging for accounts could be viewed as a new tax.
It is estimated that nine million people have basic accounts who would then need to pay, risking a two-tier banking system and the poorest people bearing the brunt of the charges.
Consumer research from PwC has found that there would be stiff resistance from consumers to banks introducing charges to retail banking.
Sixty-six per cent of consumers are aware of current account hidden charges and 50 per cent of customers would be likely to change bank if an upfront fee was introduced.
Sixty-two per cent of customers would not be prepared to pay anything for their current accounts and 27 per cent would not pay more than £10 a month.
Submissions that have been made to the Competition and Markets Authority show differences in opinion between banks towards charging for accounts.
Barclays seems indifferent, but recognises that it could promote competition; Lloyds on the other hand believes it is a step too far as packaged accounts already exist.
Tesco sees the free account system as a barrier to entry as larger banks are able to subsidise their free accounts from other sources.
On the other hand, Virgin believes a charge is necessary to promote competition.
Any wholesale change in charging for bank accounts is likely to need to be driven by regulatory change.
Andrew Bailey, deputy Governor of the Bank of England and Andrew Tyrie MP are both vocal critics of the free banking system.
How much is this going to cost?
The Financial Conduct Authority had previously commissioned a report (which Moorhouse supported) into the costs and benefits of account number portability (ANP) as a way of increasing competition in banking.
ANP would make it easier for customers to switch provider, as they would retain the same unique account identifier.
The unique account identifier typically comprises a six-digit sort code and an eight-digit bank account number.
The Current Account Switch Service was launched in September 2013 and is designed to make switching current accounts from one provider to another simpler.
However, this service does not provide ANP as the customer is issued with a new account and sort code upon switching.
If account numbers were fully portable, it would be similar to how we can now switch mobile phone providers but still keep our original phone number.
If ANP was introduced, it would likely have biggest impact on challenger banks, as their newer technology would probably mean they’d be able to offer cheaper services than the legacy banks.
However, introducing APN would require huge investment from banks as their systems are not currently set up to offer this.
Steps already in motion
Charges for banking are not a new concept of course.
With credit cards for example, we have long been able to see what they’d cost us a year as well as any extras we’d get, such as cash back or points towards air travel.
And HSBC already has a fee-paying model with a range of accounts with different charges and levels of service.
The trend is moving towards charging for current accounts but it would be a brave institution indeed that implemented fees on all accounts.
The mantle needs to be on banks to drive innovation in the products and services they offer their clients, and if that means charging for them then there is nothing wrong with that.
Banks need to put their customers at the heart of everything they do and if they are successful in this they will design products that their customers want and are willing to pay for.
While it’s unlikely that free banking will completely disappear in the United Kingdom, the direction of travel is very much towards different tiers of accounts that offer different services for different fees.
John Lunn, Partner at transformation consultancy Moorhouse
