Coming Soon to a Bank Near You: The End Of Free Consumer Banking

Coming Soon to a Bank Near You: The End Of Free Consumer Banking

Many of us are familiar with the basic services that banks provide. In simple, straightforward cases, banks keep our money and pay an interest on it, while providing the convenience of cash withdrawals along their network of ATMs. But are consumers benefitting from their banks, or are they really ripped off by hidden bank charges?

The topic of bank charges has received greater media attention in recent months. Last year, major consumer retail banks in the United States had flirt with the idea of charging consumers with current accounts a monthly fee for their money, much to the fury and indignation of many.

Loosely inspired by the then-popular Occupy Movement, Bank Transfer Day and Move Your Money was organised and consumers were encouraged to move their money from the big transnational financial institutions down to the regional-neighbourhood level. Across the United States, small banks and credit unions reported a spike in the number of new account openings, though the rate of attrition was never large enough to pose any credible threat to the banking titans.

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Media attention, however, proved to be the real deal breaker, as banks scurried to retract their plans to implement the wildly unpopular fees.

On the other hand, a recent survey by Defaqto, an independent financial research company based in London, found that more than half of UK bank accounts on the market now charge a monthly fee. Sounds surprisingly? Hardly. While consumers do not necessary have to pay an outright flat fee for the right to open and maintain a current account, they can be charged in other ways.

For starters, interest rates offered by banks are typically lower than most central bank recommendations, and are hardly enough to cover the costs of inflation. Several banks have fees for depositing a cheque, for making an internet-banking transaction, or even ‘convenience fees’ for withdrawing cash at ATMs.  

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According to RBS retail banking chief Brian Hartzer, the notion of free-banking is really nothing but a myth. In a BBC Radio 4 interview, Hartzer said:

Well, banking has never been free. Banks are expensive to run. For us, we have over 20,000 branches, 27,000 people, online banking, mobile phone banking, ATMs – these things are expensive. The computer system is expensive. So it’s actually a myth, and in fact, that myth about free-banking is part of why we’ve had all these issues we’ve had over the last decade.

Explaining his experience with Australian banks where consumers were charged AUD5 ($5.15) per month for a range of banking services, Hartzer added:

My observation coming from overseas is that it creates this perverse incentive, where you have to create cross subsidies because you have to get the revenue from somewhere. And that, I think, leads to a lack of transparency and also, of course, leads to a real challenge around competition – which people complain about. But if you’ve created a business system where a new bank can’t come in and make any money, especially when interest rates are effectively zero, banks can’t get any value from the deposits.

Returning to the Defaqto research, the implications of the findings are strong. According to Defaqto, more than half of all current accounts in the United Kingdom carry a version of account fee, with 17 percent of all active current accounts paid for. Yet, only 3.8 percent of British consumers made the decision to change bank accounts in 2010.

Might this suggest that consumers are grudgingly accepting the extra charges imposed by banks?

Mike O'Connor, chief executive of Consumer Focus, says that the "perception" of free banking is not good for competition.

"It is great not to have to pay for a bank account, but is not necessarily good for the consumer in the bigger scheme of things. Bank accounts are paid for by people who make mistakes and go overdrawn - they are often the least well-off and the least well-informed," he told the BBC.

Which begs the question: Why do banks have to resort to petty fees?

As Hartzer argued, services that banks provide have their due costs involved – that can hardly be disputed. But it can also be pointed out that counterpart Asian banks have not resorted to such fees as an alternative source of revenue. One true reason could be the lack of true competition within the big-bank banking system.

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According to a report on retail banking by the UK Treasury, big banks are simply too dominant in retail and business banking. The committee chairman, Andrew Tyrie said:

The CEOs of the large incumbents told the committee UK retail banking was enormously competitive, but a far larger range of witnesses described the industry as close to an oligopoly.

In other words, while consumers are adept at shopping around for the best deals on mobile plans, for example, consumers do not seem to be doing the same for their current accounts, possibly because of the vast complexity and opacity of bank charges.

"As current accounts are the gateway to other daily financial transactions, it is hard not to see the retail banking sector operating in a cozy, protected world," says Robert Peston, business editor for the BBC.

A plausible solution? Ring-fencing. That is, to make a clear separation between retail and investment banking operations. Through that, it would significantly reduce the chance of repeating the problems face in the 2008/9 financial crisis, and prevent investment arms from using cheap money from retail operation and/or bailout money for their operations.

But of course, the bankers would fight this to the end to keep their bonuses.

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See also: Marx was Right – Capitalism is on a Self-Destructive Path: Nouriel RoubiniSee also: Vickers' Banking Reforms: Yay or Nay?