No More Free Banking

‘Nothing in life is free, banking included… Free banking makes for a false market — it misleads both the banks and their customers and opens the door to mis-selling’

Economy Open Season

Some genius at Bigfours Bank must be planning to turn all its branches into coffee shops. His business plan is simple: the coffee will be free, but Bigfours will charge heavily for cinnamon and paper napkins. This, after all, is how his bank runs its existing business, but do the customers like it? Not exactly. Andrew Bailey — his signature appears on countless banknotes, beneath the promise to pay — thinks that they have a point.

How did they and their bank get themselves into this tangle? Time was when the banks simply charged for what they did, with a telltale entry CHRGS in their statements. Then Bank Rate took off, and money parked in a current account, earning no interest, could be lent out again at a fat margin. Those were the days of windfall profits, and at the Midland Bank the penny dropped: “Free banking”, it proclaimed, “if your account is in credit.” It worked like a magnet — too well, in fact, because all the Midland’s  competitors had to match its offer. Soon enough free banking stopped being an incentive and turned into a universal assumption, or even a human right. 

Today, with Bank Rate at its lowest for 318 years, the windfalls have stopped falling, but someone or something still has to pay for all those branches and for all the machines that spit out money day and night.  This can only be the customer, but short of simply billing him, how can the banks get to him? All the ideas that they have tried turn out to have a catch in them.

The first was cross-selling — once defined as making people cross by trying to sell them something  they don’t want. Let’s turn the branches into one-stop financial shops and make them sell insurance, for a start. They missed the basic point that there can be little reward in trying to do everything, and the plan culminated in self-parody when the banks dreamed up Payment Protection Insurance. This was something that their customers almost demonstrably did not want, and those who were sold it have had to be compensated, at a cost that has run into billions. 

Another idea has been to attach a fixed fee to an upmarket bank account. This is sure to have a glossy brand name and a smart plastic card to match, and will offer fancy benefits and add-ons, few of which have much to do with banking. The great Brian Pitman of Lloyds saw the need for a club class model of service — there must be room, he thought, between first class and Ryanair — but it has yet to fly. 

No wonder that the banks have fallen back on the oldest money-maker of them all: squeezing the customers — charging them more for lending money to them. In the distant days before free banking was invented, a first-class private customer might expect to pay 2 per cent over Bank Rate, and for a feckless borrower, the margin might expand to 5 per cent, by way of warning. No such luck today. The rates that the lenders are happy to advertise tell their own story, and if you are unwise enough to borrow on your credit card, or careless enough to overdraw beyond your limit, you will soon find yourself in the grasp of compound interest and struggling to escape.

It has been left to Andrew Bailey to observe that all this makes no sense. He speaks for himself, but he speaks with authority — as an executive director of the Bank of England, who in his previous job as chief cashier had to cope with Northern Rock and still find time to sign the banknotes. He knows what can go wrong with high street banking, and he can see what is wrong with it now.Nothing in life is free, he says, banking included. To call it free is to sever the link between costing and pricing. It makes for a false market, it misleads both the banks and their customers, and it opens the door to mis-selling. We need a far better sense of what we are paying and how we pay for it, and we shall never get there while the illusion persists.

Some regulator might, one day, call the shots, and so claim to promote competition. Certainly the high street could do with more of it. Which high street bank, like a latter-day Midland, will choose to tell its customers that the age of free banking is over, and offer them a better deal? This selling point might come more easily from a new entrant to the market — the Bank of Marks & Spencer, say, with its plans for 50 in-store  branches, and (surely) its own ideas about value and pricing. That would make the planners at Bigfours sit up, and might take their minds off their coffee-shop model. 

Somewhere in the depths of their head office or at a pensioners’ party, they must be able to find an old hand who can remember how CHRGS worked. Quite well, in their way, and better than giveaway coffee and overpriced napkins.