No such thing as a free lunch – or bank account

  • Rich Wagner, CEO at Advanced Payment Solutions

  • 05.08.2015 01:00 am
  • undisclosed

Statistics released today by Tesco Bank, revealing that 55% of banking customers have no idea how much their so-called “free” traditional bank account costs, come as no surprise. The word “free” used by traditional banks is misleading – in reality, banks rely on stealth charges and punitive overdraft fees to make current accounts profitable.

The report comes just months before the expected outcome of the Competition and Markets Authority’s (CMA) full scale investigation into ‘the big four’. With the CMA currently analysing the potential benefits of putting an end to “free” bank accounts, the results of this review could change the traditional banking landscape as we know it.

The possible end of ‘free banking’ is a controversial issue. Understandably so – people are bound to fear the consequences of paying for a service that for three decades has been provided for free by the largest banks. However, the problem lies in the word ‘free’. In reality, according to the Office of Fair Trading (OFT), a so-called ‘free’ bank account costs an account holder on average £151 a year, thanks to numerous add-on fees, including fines for exceeding overdrafts.

Why the hidden costs?

The UK’s biggest banks have worked themselves into a sticky situation. Having launched revolutionary no-upfront-fee bank accounts thirty years ago, they remain bound to this promise today. In reality, banks lose money on accounts that sit unused and this cost has to be made up somewhere – usually, through stealth charges and punitive overdraft fees.

Hervé de Carmoy, the former head of Midland Bank - the first bank in Britain to offer customers free current accounts – has even admitted that the decision to remove upfront fees was a mistake. Midland Bank’s launch of free bank accounts in 1984 led to 450,000 new customers signing up within a year. Its competitors soon followed suit – thus creating the ‘free’ bank account landscape we see today.

Undoing the damage

Banks will struggle to move away from this model, which relies on keeping their customers in the dark. Explaining to customers that they will be no worse off with the launch of upfront fees, because banks have been secretly charging customers all along, will likely prove to be an awkward conversation.

This is a great example of where traditional players can learn from their younger, FinTech counterparts. Banks’ previously unchallenged dominance in the market has led to a culture of opacity amongst the biggest players. With the rise of FinTech alternatives, which have brought transparency and open pricing to the market, banks are no longer able to rely on the blind trust of their customers.  

Instead of sneaking in fines to our customers, we are open about the monthly cost of owning a Cashplus account. As such, rather than sending customers a bill for exceeding their overdraft, we let the customer choose how they want their account to be managed. This means only allowing customers to go over limit who specifically request for this service, as - we don’t want to force indebtedness upon those who wish to avoid it. Furthermore even when they take advantage of our credit products, we actively contact customers to let them know they are about to exceed their limit so they are in complete control of their relationship with us.

There is clearly appetite for such transparency – customers understand the concept of paying for a good service, and would rather do this openly, with full view of what they are being charged for. It will take a huge attitude shift to bring such openness into the traditional banking industry. Banks will need to start thinking about how they can actively support their customers to stay out of the red, rather than profiting from their financial difficulties. 

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