Why an end to Free Banking would be totally bonkers
Posted in 'Banking' by Barry Stamp
07 June 2012
We reported last week about the call from a senior executive at the Bank of England to end ‘free banking’ – something that consumers campaigned for, won, and have enjoyed for over 26 years.
The Chief Executive Elect of Prudential Regulatory Authority and executive director of the Bank of England, Andrew Bailey, says that the banks have ventured into selling Payment Protection Insurance, (PPI), which they would not have done had they had income from current account customers on a clearly defined tariff for what in banking is called ‘transmission charges’
And of course we all know what a disaster that has been for the banks which are now making billions of pounds of provisions against claims for mis-sold PPI policies.
In stark contrast, free banking has not been a disaster for the millions of consumers who had the common sense not to take out PPI, (there were enough warnings around – especially on Checkmyfile), and who have managed to take advantage of free banking for a considerably long period.
As someone who has worked in banking before free banking was introduced, I would like to remind us all of the significant cost of paid-for banking services. Transmission charges are not cheap. Ask any business owner who pays bank charges – every cheque paid in, every cash withdrawal, anything at all that ends up on your bank statement comes with a hefty charge attached to it. Add up each transaction charge, and every quarter (if quarterly charges are re-introduced rather than monthly charges), every consumer should expect to pay hundreds of pounds in bank charges if free banking ends. In the early 1970’s, some consumers were already paying hundreds of pounds in bank charges per year – how easily that pain is forgotten.
Originally free banking was introduced because of consumer pressure about the fact that the monies held in current accounts do not earn interest and are effectively a ‘free’ source of funding for the banks to lend out as loans and overdrafts.
Because of something called the bank multiplier, for every £1,000 of current account deposits held, banks could lend around £7,000 of loans, so at a 12-13% interest rate, banks could get the same amount back in interest each year as the deposits it holds. Combine this with the interest earned on monies in transit, and it soon becomes obvious that by levying bank charges on consumers who effectively lend money to the bank at no cost becomes something close to profiteering.
Does the Bank of England really think that if bank charges were still in place, the banks would not have tried to sell PPI? Of course they would have done, just in the same way that they try to sell us life insurance with a mortgage, or a ‘premium’ account giving a package of benefits that we like the sound of, don’t really want, and are rarely used. Banks are in business to make a profit and by far, free banking is one of the most beneficial aspects of the UK banking system as it helps to moderate those profits.
As for the end of free banking provoking a fair tariff of bank charges for all, believe me, it would be easy for a bank to justify quite high transactional fees. It does this already on business accounts and on international money transfers. The banks will have no difficulty at all justifying their figures.
We’d all end up a lot worse off, and the banks would still be trying to sell us stuff we don’t need.
Barry Stamp is a co-founder of Checkmyfile, is a Fellow of the Institute of Credit Management and a Chartered Banker. He can be contacted at email@example.com.
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