Counting the cost of ‘free’ banking: in response to Andrew Bailey
Andrew Bailey, who will soon become chief regulator of the financial services industry, has called for an end to free banking. The banks themselves have long been divided on this issue: on the one hand, they can sniff a brand new revenue stream from monthly current account charges, but on the other, they know that unless all providers introduced charges at exactly the same time (which is highly unlikely) there would be an enormous first-mover disadvantage as customers switch to accounts that are still offered for free.
If anyone can be expected to know the price of things, it is of course Andrew Bailey. You may recognise him from your wallet or purse – as the Bank of England’s Chief Cashier, his signature is on all of our banknotes. But Bailey’s advocacy of fee-charging accounts seems to be based on some rather dubious logic. And it seems certain that any such move would reverse some of the successes of the financial inclusion agenda in recent years.
In fairness to Bailey, his objective is to enhance the stability, transparency and honesty of financial transactions. We already pay for current accounts, argues Bailey, through a series of more discrete charges. But if we started to pay a small, monthly fee up-front, would banks reduce, for instance, the high penalty payments that can result from going overdrawn? We also pay, in a more roundabout way, through the higher cost of other services, like bank loans, which is used to ‘subsidise’ free banking – Bailey thinks this kind of service might also be discounted following the introduction of monthly fees. On both counts, it remains to be seen.
The most direct way in which we pay for current accounts is of course through ‘interest foregone’. Interest is technically what the banks pay us, for lending them our money, but by offering lower interest rates on current accounts than on most other forms of banking, they are taking a bit of a rebate in order to cover their cost. In fact, the Vickers Commission recommended that banks explicitly tell us about the amount of interest we are hypothetically forgoing in this way. Andrew Bailey’s proposal goes much, much further.
Perhaps his most controversial argument is that, free from the burden of subsidising current accounts, banks would no longer feel the need to mis-sell products – Payment Protection Insurance being the best recent example – in order to make a profit. This has angered some commentators, such as The Guardian’s Phillip Inman:
Maybe he should explain his thinking to a judge. His defence of banks would be like a pickpocket saying he was forced to steal wallets because he was denied other sources of income. In his speech, Bailey seems to accept the industry argument that they should make mega-profits. He just wants them to do it in a more legitimate and sustainable fashion. Yet they should forget about mega-profits. Never again should they be seen as vehicles for shareholders to make their fortunes.
Inman’s reference to banks’ profits points towards another highly controversial aspect of Bailey’s argument, especially in the current political climate; that is, that we should simply accept that banks can and should make significant profits. If so, then he is probably right to say that the way in which they make profits should be as transparent as possible. But it is equally plausible to argue that financial products like current accounts are, in a financialised society, a basic need that it would be virtually impossible to function without. According to this alternative argument, although financial institutions like banks of course have to be sustainably financed, it should not be forgotten that they are the servants of the ‘real’ economy, and therefore duty-bound to offer things like current accounts for free (more or less). That this bargain does not quite work perfectly in practice does not mean we should rip it up entirely.
The status of financial institutions as our servants was underlined by the introduction of basic bank accounts (BBAs) in 2003, as part of the financial inclusion agenda. BBAs allow the deposit of wages and benefit payments automatically, direct debits to pay bills, and withdrawals at cash machines. But they have no overdraft facilities or cheque books, and limited debit card facilities. They were designed to help very low income customers, who banks were traditionally reluctant to offer services to. BBAs have already been undermined by branch closures, the growth of fee-charging cash machines, and the withdrawal of some providers from the BBA market. Would BBAs be exempt from monthly charges? It seems unlikely the banks would agree to this, in fear of customers (perhaps irrationally) switching to BBAs as a result. The introduction of charges could therefore leave accessible banking in a perilous state.