Why free banking is bad for you

According to the regulator, free banking does more harm than good.

The vast majority of us do not pay for our banking services. When we open a bank account, we expect not only decent customer service and the option of managing our money online, but also that we won’t have to pay a penny for the privilege.

However, according to the most senior regulator in the land, that situation is doing you more harm than good.

Making a loss

According to Lord Turner, the chairman of the FSA, banks are using ‘loss-leader’ tactics. So they accept they will make a loss on the current accounts, in order to get you through the door and try to flog you everything else they offer, from a mortgage to a loan to pet insurance, products on which they do make healthy margins.

And it’s precisely because they are making losses on current accounts that the banks are so persistent in trying to sell you other financial products, as the staff are given high sales targets in order to make up for that initial shortfall.

As a result, many of us end up taking out products we neither want nor need as a result of the hard-sell approach, which the FSA reckons costs us a whopping £500m a year.

We’ve all been there

Turner certainly has a point. I remember when my wife and I popped into our local branch of Halifax to open a joint current account ahead of buying our house we were bombarded with the hard sell for everything the woman could think of.

In the half an hour meeting we were supposed to have to discuss the account, the first 25 minutes were spent withstanding the sales onslaught. It was ridiculous.

Just say no!

There is a fairly simple solution to all of this, of course, and that’s to say no.

Easier said than done, I know. I’ve been guilty of giving in and signing up to something in the past, just to get the salesperson to stop talking. But it’s true – if you stay focused on what you want in the first place, and ignore everything else, you’ll be fine.

The banks don’t like it

It will likely come as no surprise that the banks themselves aren’t big fans of free banking. Earlier this month, John Varley, the chief executive of Barclays, suggested that free-if-in-credit banking may have outlived its time, describing the concept as idiosyncratic.

After all, they would love to be able to charge for what they currently do for free – who wouldn’t?

Banking isn’t free now!

However, you have to wonder just how free our banking is already. After all, if you dare slip into an unauthorised overdraft you are absolutely hammered with charges.

If your bank has treated you unfairly, check out these five steps to help you complain successfully

According to the latest figures from the Bank of England, the average interest rate on an agreed overdraft has rocketed to 19.09%, an all-time high. Indeed, as you can find out in this article, some Overdrafts are more expensive than payday loans!

What’s more, some banks have admitted that its customers are unwittingly paying for their banking services already. In a session with the Treasury Select Committee last week, a director of Lloyds TSB confirmed that typical current account holders were paying the equivalent of a cup of coffee a week, in the form of ‘forgone interest’ – that means, the interest you would be getting if your account paid you the current bank base rate, rather than no interest at all.

The bank reckons that amounts to about £150 a year.

During the same session a director from Royal Bank of Scotland came out with this admission: “Banking has never been free.”

The alternative

So what is the alternative to what we understand as free banking?

Some banks already charge a monthly fee for their current accounts, usually because you get extra services, such as travel insurance and breakdown cover. If the banks had their way, this would become the norm, as it already is in many countries in the Western world.

However, it strikes me as pretty fanciful to suggest that if all banks charged, say, £10 a month for their current accounts, we'd all suddenly enjoy a better service, as Turner appears to be suggesting. Would the sales staff be given less tough sales targets? Would banks start paying better rates of interest? Maybe I'm just getting old and sceptical, but I doubt it.

However, the writing is on the wall. The Government has given the Commission on Banking the task of reviewing how our banking sector works, and suggesting ways to improve its competitiveness, as well as ensure that taxpayers are protected from any potential bank collapses in the future. It’s due to report next September.

What we understand as free banking may be dead within a year.

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