Written by the Find.co.uk Editor, 13th December 2006.
A regulatory clampdown on payment protection policies and an OFT investigation into overdraft charges have sent the banks scurrying to look for new sources of income.
Whereas until recently banks could get away with charging exorbitant penalties of up to £30 each time a customer went overdrawn, the BBC’s Money Programme has revealed that the actual cost of handling a bounced cheque or an unauthorised overdraft is just £4.50 and £2.50 respectively.
Compensation
Such revelations have only served to encourage aggrieved customers to sue their banks in the small claims court, with thousands winning substantial amounts of compensation because the banks have chosen not to defend these claims.
In addition, the Office of Fair Trading recently ruled that credit card penalties of more than £12 for late payments are unlawful so that card issuers will no longer be able to levy £25 charges for such misdemeanours. The OFT is also considering capping the fees that banks levy for unauthorised overdrafts and cancelled direct debits.
The net result is that banks are set to lose a significant proportion of their UK retail banking profits and will be looking to recoup these losses elsewhere.
The fact of the matter is that the UK remains one of the few countries in the world where free banking is still available. Most European counties, America and Australia charge a monthly fee for holding a current account, as well as charging for cheque-handling. For instance, Spanish banks charge for just about every bank service you can think of, so watch out Abbey customers!
Future for free banking
But Brian Capon, head of media relations at the British Bankers Association, thinks free banking will survive, at least in the short term: "Banking in the UK is highly competitive and whether free banking continues will depend on where individual banks want to position themselves in the market. Unlike in other countries, we've had free if in credit banking in the UK for the past twenty years and I can't see it disappearing overnight. Ultimately though, it's for the individual banks to decide."
That said, the UK’s current retail banking model depends on delinquent customers subsidising the well off. For instance, Lloyds TSB pays 4 per cent gross AER interest on its Premier and Platinum current accounts, on condition that customers pay in at least £1,000 a month and bank online - a pretty good deal compared to foreign bank accounts.
But will solvent customers be prepared to give up interest on current accounts in order to subsidise banking services to delinquent customers? I think not. Despite this, a number of high street banks are looking at ways of shifting the current cross subsidy which exists between delinquent and solvent customers, but in a way that credit worthy customers will find acceptable.
So what are the options?
Charging all customers a fee per transaction or pay-as-you-go basis irrespective of their credit status? Charging tiered costs according to a customer’s bank balance? Or will more banks adopt First Direct’s BOGOF model - buy one product and get one free? Or what about charging all customers a flat fee, irrespective of their credit status, in the interests of simplicity? Or will the banks seek to raise more revenue through ‘premier accounts,’ which are monthly fee charging accounts which come with a package of ‘free’ extras, such as roadside cover and travel insurance?
Halifax is set to launch a premier account in early 2007, while First Direct will start charging current account customers £10 a month from 1 February 2007, unless they credit £1,500 a month to their accounts, or take out another product with the bank, such as a savings account, mortgage or home insurance.
Making a straightforward monthly charge or dressing up fee paying accounts as premier accounts look set to be two of the models for the future. Which becomes more prevalent remains to be seen. But in the meantime, bank customers should make their views known before the banks foist more unpopular charges on us all.
To have your say, email us at feedback@find.co.uk. The debate has only just begun.