Bank Free – As Free As the Wind Blows

Free banking is taken for granted – but how long will it remain, especially for the not so credit worthy? Paul Hughes from Harrington Brooks’ customer services department explains the current landscape of free basic bank accounts.

Like many of those aspects of modern life that we cannot do without, a bank account, at heart, should be a very simple thing.

A place where money can be received, safely and securely, and from where it can be reclaimed, ought not to be too difficult to provide.

This week’s news that Co-Op are to cease providing bank accounts to those who have not been discharged from bankruptcy, raise the bigger question of availability of free and basic bank accounts.

Their main issue is that they have a “disproportionate market share of the basic bank account market” – a normal complaint for any company wanting to expand – yet Co-Op’s problem is that their market share is too big! Why are they taking such extreme steps to reduce decrease their role?

The Un-level Playing Field

Retail banking Managing Director John Hughes believes that an “un-level playing field” is in existence, meaning they are taking on the burden of providing bank accounts to those who are not in a position to – nor have the potential to – help banks make more money.

The FSA maintain a guide detailing the basic bank accounts offered by the major banks and building societies. Click image to view.

A basic bank account, if it is not providing an overdraft (which, in essence, is credit – hence there is no need for a credit check; A misassumption that intimidates many people away from switching banks) and does not charge a monthly administration fee, nor missed payment fees should, in theory, not cost any money to the account holder.

These bank accounts are not seen as profit-makers, and so their viability as a product for consumers has little appeal to the bank themselves, despite the good PR of being seen to help some of those in the most difficult financial straits.

A Profit Amongst Their Own People

In fact, for the bank these ‘products’ are actually loss-making, if the operational costs of running these accounts are included. For example, as part of their campaign to reclaim bank fees back in 2009, consumer action website MoneySavingExpert.com reported that a fair figure for actual cost to banks was £2.50 a time. That was a lot less than the £40 being charged on average to each overdrawn account, even accepting the need for the amount to be punitive to encourage people to avoid going overdrawn.

Like most companies, banks are also keen to ‘capitalize’ on the opportunities to sell other products too. If a customer has a basic bank account, the potential for them to contribute funds in other ways, say mobile phone insurance or breakdown cover, is very low.

So free banking does actually have a cost, from literally providing the paperwork or IT operation, to the more hypothetical projections of a bank’s growth where they could be, but are not, making more money off their customers.

The Empire Strikes Back

Back in May this year, the new chief regulator of the FSA addressed this issue – from the bank’s perspective.

Andrew Bailey, who began his new role in July, commented that there was “a dangerous myth” of free banking, and that the provision of free banking may have encouraged banks to attempt to make money in other ways: resulting in the aforementioned astronomical bank charges, and the more recent missold PPI scandal.

In a subtle way, this is batting the responsibility for these issues back on to the consumer – if people accepted charges for bank accounts, there wouldn’t be need for such aggressive moneymaking on charges and products like PPI. Calls for an open and honest discussion have been heard. Co-Op’s decision this week is perhaps the first contribution to this discussion.

It is a far cry from the prospects raised in Alastair Darling’s 2010 budget, where the soon-to-be-ousted Labour Chancellor intended to make banking accessible to everyone in society. The introduction of a scheme “to require banks to make available simple current accounts to all citizens”, according to the then City minister Lord Myners, seems further away than ever.

Freedom Isn’t Free

Co-Op’s main objection to the position they found themselves in, the ‘un-level playing field’, arose, head of banking Robin Taylor believes, from a lack of “industry-wide agreement.” How to deal with ‘loss-making’ customers, but who find it no less necessary to have a bank account to receive benefits, wages or arrange direct debits to pay for other essentials like utility bills and council tax than anyone else, is surely necessary.

“Everyone needs the option of having an account,” Sarah Brooks, director of financial services at Consumer Focus, told the BBC, “which, as a minimum, lets them access their money safely and conveniently, make payments and receive their salaries and any benefits”.

Whether through a communal fund providing a government-administered bank account, or legislation commanding basic universal accounts to be provided by each bank for all circumstances, the problem is clear, but the will to solve it is not apparent.