Cicero Policy Briefer

Issue 16, September 2007

Current Accounts: how do they do it for the money?

By Jacob Coy

Being American, I don't really understand the prevailing sense of God-given entitlement to free banking. I remember being bowled over when I went to Citibank on the Strand as a student and the banking assistant explained to me that there would be no charges for either my Sterling current or US dollar savings account. And that I would not incur charges for using any high street bank/building society ATMs. And that I could make payments to other accounts in the UK without charge. And that this is all totally common. How can they offer all of this free service, I wondered.

Now, I try to reconcile free banking with the other free things in life. Terrible, trashy evening newspapers are nasty, awful scraps which are littered all over the street, train, and bus. Free concerts are rarely more than painfully contrived local events where everyone just mills around, neither fully appreciating the music or creating any real sense of empathy amongst fellow revellers. I pitch most of the free curry menus that come through the door away. Essentially, as consumer-minded people, we have a difficult time valuing goods and services that are given to us for free. We don't rationalise these resources to maximise utility—why should we?

The anomaly is banking. It is free and, on reflection, it is of significant value. Make no mistake, I do not have a love affair with my bank—far from it. Yet the fact is the bank takes my money, keeps it safe, sends me statements, gives me phone and internet services, allows me to pay people, absorbs fraudulent charges, and gives me my money for free from other banks' cash points at all hours. Love, hate or otherwise, those are the facts.

Furthermore, I have no loans or overdraft, meaning that the bank has never made any money directly from me. I suppose one might argue that they make money by lending my money (true)—but this is extremely minimal as I don't have much money with them at any one time. To compound their predicament, I don't make them my sole supplier of financial services for credit and savings products. They operate in a highly competitive market.

As I understand the terms and conditions of my account, they would provide exactly the same service if I constantly maintained balances of only £10-15. Cost, cost, cost—no revenue.

Yet any time a high street bank proposes charging for services rendered, they go where angels fear to tread. They plan for the media backlash in the personal finance pages, the near anaphylactic reaction by many customers and consumer groups, and analyst commentary about strategy and implications for their retail operations. Remember when Barclays tried to charge for using their cash points and were shamed into retreat in a matter of days if not hours? Yet who can reasonably argue that it doesn't cost money to install and maintain cash points? Should that always be free?

What should be free and what should we expect to get for nothing? This brings me back to whether it is right to charge for recent leaver overdrafts. It would seem reasonable enough that the banks may offer relief on overdraft charges for customers who are students. It's a competitive edge and may serve to build a long-term relationship. But it seems pretty far-fetched to then demand that the bank continue allowing customers to have borrowed money interest free. What message does this send about how money works and financial literacy? That you are entitled to money and credit that's not yours for free? Surely this is the wrong message to send.

It would be refreshing for the banks to have the courage to take a stand and say: Look, we provide a good service to you. In current accounts alone, we clear millions of transactions a day worth tens of billions. Every month, we send out millions of pages of statements, and each year we spend great sums on everything from security to branch networks and post. It's not realistic for us to do it for free. What other valuable good or service do you get for free?

Of course, any bank which does stand up and say that needs to do so with a couple of important commitments. Firstly, that it will apply the principle across the product range. This means having straightforward and transparent charging on all products (which customers should value), not just current accounts. This means penalties and charges. This means loans, and the insurance sold with them. This means ISAs, pensions and investments (either their own or a third party’s). And secondly, there must be a commitment to exceptional customer service in order to justify the charges.

I'll be the first to admit that this is out of kilter with current mainstream thinking. But to me, it is equally incongruous that we are somehow entitled to all of it for free.

Jacob Coy can be contacted on +44 (0)20 7665 9535 or click here to email.