Consumer lobbyists Which? hit the headlines this week with its report into what it called the “myth of free banking”.
It stated some consumers were paying as much as £900 a year in fees for overdraft usage, taking cash out abroad and poor interest rates on savings.
The media was full to bursting about why the idea of ‘free’ banking doesn’t exist – but an area that wasn’t questioned is why we ever thought it did.
The earliest instance of consumers being offered free banking arrived in 1974, with the Co-operative providing the service for personal customers who remained in credit.
But perhaps the marketing that was most memorable was a slightly cheesy television advertisement in 1984 from the Midland Bank, now part of HSBC.
In it, the Midland golden griffin excitedly tells the audience that personal account customers can now enjoy cheques, statements, ATM withdrawals and standing orders free of charge, providing they stay in credit.
Almost immediately, every high street bank followed suit – and despite protestations from the Office of Fair Trading, the Financial Services Authority, the Competition Commission and the Independent Bank on Commissioning that the term ‘free’ was misleading, the misnomer stuck.
A whole new generation grew up with the term ‘free banking’ and believed it was receiving their current account at no charge – but what the industry has known for years is that customers are simply paying for the service in other ways.
The famous 1984 advert
It's now instilled in our culture to expect banking for free. But even for those good customers who stay in credit, there are so-called hidden charges they may not realise they’re paying, including receiving poor interest rates on any money in their account.
The worst account for those always in credit according to Which? is the Lloyds TSB and Bank of Scotland Classic, or Classic With Control Account, which costs the average customer in credit £62.97 a year.
Even if you’re prudent and place any spare cash into a savings account with a better interest rate, you can still end up paying - people are often caught out by using banking services while abroad.
Lloyds TSB, NatWest and Halifax are named as the most expensive for withdrawal and loading fees. Metro Bank, a relative new comer to the high street, will let you use your card overseas for free however.
If you’re constantly living in your overdraft, the fees can soon become enormous. Even authorised overdrafts – where you agree them with your bank before using them – can charge 19% interest; that’s more than some credit cards. And if you use an unauthorised overdraft you can be paying fees daily.
Perhaps you’re feeling smug because you use a paid-for account where all the costs are up front?
While your overdraft fees may be smaller and your interest rate on credit slightly better, you may have been ‘given’ bolted on products for your fee – options which you may not need or even want.
Examples include travel insurance and breakdown cover; it’s important to check the details to ensure you’ve got as much (or as little) coverage as you need.
There’s no point paying more for a global travel insurance premium with winter sports included if you never ski and only go abroad once a year.
The British Bankers Association criticised the Which? report for being “disingenuous” and said it was possible for customers to bank for free f they don’t go overdrawn.
It also explained all banks publish a clear guide to charges on their sites. If that’s the case, why are we surprised at any fees we receive, and should we pay them at all?
Should we pay?
The questions about the future of ‘free’ banking have been around for some time – but it was brought to the fore recently after Barclays hinted it may do away with the service during an interview with the Sunday Telegraph.
Sir David Walker, new chairman of Barclays, told the paper he agrees with the principle that customers should pay to use current accounts, before causing outrage by suggesting recent banking scandals such as mis-sold payment protection insurance and interest rate rigging were a direct consequence of not charging for bank accounts.
"Because banks are not charging, it drives them inexorably into this sort of position," he said.
Peter Vicary-Smith, Which? chief executive furiously denied that was the case. “It defies logic to suggest the only way to persuade bankers to behave responsibly and stop mis-selling is to give them even more money. The retail banks have been profitable throughout the financial crisis.,” he said.
A source close to Barclays told Huffington Post Sir David’s quotes were somewhat taken out of context, but quibbles over misquoting aside, the question of whether banking scandals could have been prevented by paid-for accounts is intriguing.
Jonathan McMahon, global head of bank regulation and restructuring at consultancy Mazars, said there was pressure on banks to increase fee income, since they were now originating fewer loans and had stopped selling insurance products on loans.
However, it is difficult to argue UK banks would not have manipulated the Libor rate if they hadn’t been scrabbling around for more income.
“The conditions of 2008 were exceptional, and the focus was on day-to-day survival rather than long-term profitability,” he told Huffington Post.
Jonathan Potter, co-founder of currency exchange marketplace CurrencyFair, predicted there would be public outrage if the anticipated parliamentary inquiry finds UK taxpayers should be paying for services.
“Who will want to start paying for a service, which if anything has deteriorated recently?” he added.
Research from HSBC on customers' views on free vs paid-for banking back in June 2010 showed 77% of people thought people who manage their money properly should have access to free banking.
Despite this, a spokesman from HSBC said the bank did not have a stance on free banking, preferring to offer a non-paid option, a £15 a month option with no overdraft fees and a £12.95 a month option which offers travel, life and ID theft insurance and roadside assistance, plus it’s Premier Account.
A spokesman from Barclays said much the same; customers can choose from a range of accounts with different rates of interest-free-if-in-credit, basic bank accounts and packaged fee-paying accounts.
Tomorrow, Huffington Post will publish a report into what the future of free banking holds, and whether we will all end up paying explicit fees up front.