Free banking 'misleads customers'
Published 24 May 2012 by Helen Gradwell
Andrew Bailey has said that though many bank accounts claim to be free, they can mislead customers and charge unexpected fees.
In 1984, Midland Bank decided to get rid of current account charges in an attempt to corner the market. This worked very well - so well, in fact, that other banks had no choice but to follow suit.
A report from the Telegraph describes how Andrew Bailey - the chief executive-elect of the Prudential Regulatory Authority and the executive director of the Bank of England - is considering putting an end to this practice. It is an attempt to improve the way customers are treated and end mis-selling scandals.
Mr. Bailey referred to free banking as a "myth" and added that it "encouraged the mis-selling" of payment protection insurance and other products - and this has cost billions in customer compensation. Britain is one of few countries in the world that does not routinely charge customers a fee for their current account.
He also suggested that free banking gets in the way of competition. 'Customer inertia' could be ended by banks making charges on their accounts more visible and up-front - encouraging customers to switch. As it stands, customers are statistically less likely to switch their bank account than they are to get a divorce.
Mr. Bailey implied that free banking is very rarely actually free, and that charging up-front would help us "have a much better sense of what we are paying for and how we are paying."
He added that when accounts are free "it means that we pay for our banking services in ways that are hard to link to the costs of the products we receive. This can distort the supply of banking services."
Mr. Bailey recognises that putting an end to free banking would be complicated, as banks could not independently put current account charges in place without losing customers, and if the whole industry acted together they would "appear to collude."
An expert from thinkmoney commented: "'Free' bank accounts can be useful for people who manage their money carefully and rarely incur charges, but many customers have been hit with high fees for going into their overdraft or bouncing a cheque.
"Although it may seem like you would pay more for an account that charges an up-front fee each month, it can be reassuring to know that you wouldn't be hit with unexpected charges. The thinkmoney Current Account charges a transparent set-up fee and a monthly fee - but we do not charge overdraft fees. In fact our account won't even allow you to go into overdraft. We will never hit you with unexpected charges, so you'll always know where you stand with us.
"For your money, you also get help managing your finances. The thinkmoney Current Account is a managed account with two separate sides. One account is for your 'bill' money, and we will do everything we can to make sure that you have enough in there when all your bills are due to leave the account. The other account is for your spending, and the rest of your income will go into there. You can do whatever you like with this money, knowing that all your essential expenses have been accounted for - and that you won't incur other charges."