The end of free banking in the UK was signalled on 24 May 2012 by Andrew Bailey.
If you wonder who he is, then have a look at a £10 note. His signature will be there as Chief Cashier. Andrew Bailey has now been promoted to Executive Director at the Bank of England. And from next year he will almost certainly be a deputy Governor of the Bank and Chief Executive of the Prudential Regulation Authority.
Never heard of the PRA either? Don’t worry it doesn’t exist yet. It is one of the two separate regulators that will emerge when the Financial Services Authority splits in two next spring. The other is the Financial Conduct Authority. The PRA will be able to intervene in the market if it feels that major financial institutions are not behaving in the public interest.
And on 24 May Andrew Bailey told us what he would like to do when (OK, ‘if’) he takes on that role.
“the reform of retail banking in this country cannot move ahead unless we tackle the issue of free in-credit banking, and have a much better sense of what we are paying for and how we are paying.”
And he warned “it may require intervention in the public interest, not least because it is a way to encourage greater competition.”
In other words he would use his powers to make banks charge us all for our current accounts.
The "myth" of free banking
Most people in the UK believe that they have ‘free banking’. If they keep their current account in credit then there is generally no charge for most of the services the banks perform for us including making and receiving payments, keeping our money safe and letting us have free access to our money through a network of 36,000 cash machines.
Those are valuable services and – free as they seem – someone has to pay. In fact we all pay the cost in two ways. First the banks lend out our money at a profit. Second they charge us heavily when we go overdrawn or travel abroad.
The Office of Fair Trading estimated that banks made £8.3 billion between them from personal current accounts in 2006 – more than they make from savings accounts and credit cards combined. Most of that was made up of £4.6 billion from interest earned on our money (and charging us high rates of interest when we are overdrawn) and £2.6 billion from direct overdraft charges.
That is why Andrew Bailey believes free banking is a myth and that competition would be better if we paid openly for the valuable services the banks provide us with.
Why they don’t charge
The banks would love to charge us for our current accounts and the services they provide with them. And they all offer us the opportunity to pay for a current account – the charges range from £24 to £300 a year. But most people wisely turn down the offer of paying for a current account they could get without paying a fee. The banks bundle in an insurance policy or two – which most people do not need – and other benefits which – with the odd exception – are generally not worth the monthly cost.
But there is an insurmountable barrier that stops the banks charging all of us for the banking services on our 130 million current accounts.
If one of them started charging for all its current accounts then it would lose customers to competitors who continued to offer free banking.
But if they agree to do it together they will be guilty of anti-competitive behaviour and could be fined up to 10% of their turnover – potentially billions of pounds.
So they are stuck with the present system. And that is why Andrew Bailey made it clear that he would like to cut that Gordian knot by intervening in the market to make sure they could charge. He would probably do that by saying that keeping the cost secret was anti-competitive and charging would encourage competition and that would ultimately be good for us.
If he does decide to intervene he faces several problems.
First, what do you do about the 9 million people who have a basic bank account? The banks agreed more than ten years ago to introduce these simple accounts with no overdraft facility. It was partly to reduce the number of people who had no bank account and faced higher costs and greater inconvenience in managing their money. The new accounts were also needed to help the Government’s own policy to pay state pensions and benefits directly into a bank account and scrap the costly system of paying them by giro or order book. The new Universal Credit, which will replace many benefits from October 2013, will only be paid through a bank account.
If there was a charge for all bank accounts some excerption would have to be made for people on benefits. And that would probably mean a tightening of the criteria for access to basic bank accounts – which currently are also used by those with poor credit records and on low incomes from work.
Second, public reaction from the middle swathe of society who do not go overdrawn and do not believe they pay for their banking would be hostile. Many are not on high incomes and would complain vociferously if the Government (as they would see it) forced them to pay for a current account which, through careful management, they currently keep free.
Third, a current account is now such an essential part of life that charging people to use one would seem like a tax on living. It would be particularly hard for those in low paid jobs whose employer insisted on paying into a bank account as most of them now do.
Fourth, would he ban any bank from not charging for a current account? If so, that in itself could be seen as the most anti-competitive move of all.
Andrew Bailey recognises some of these problems. He said “I know from last time I raised the subject that the reaction is mixed.”
But he warned that would not put him off.
“I am like a dog with a bone on this one, I don’t think we will have a retail banking industry that is properly serving the interests of the public until we tackle the dangerous myth of free in-credit banking. “
The official Bank of England line is rather milder. A spokesman told me “He was speaking to stimulate debate on an important topic.”
Personal current accounts in the UK, Office of Fair Trading July 2008
The future of UK banking – challenges ahead for promoting a
stable sector, Speech by Andrew Bailey at Westminster Business Forum 24 May 2012 http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech574.pdf
The final paragraph is the relevant one.