The “free if in credit” pricing model for personal current accounts, adopted by major banks in the 1980s, is fundamentally flawed (FT Money, FT Weekend, January 30). It may just have made some sense when interest rates were high enough for banks to enjoy the endowment effect of lending money out at interest where the funds were sourced from interest-free current account balances. This profit could then cross-subsidise the operating costs of servicing these accounts.
However, this logic was undermined from the start by the fact that the major banks never extended free current accounts to their business banking customers.
Andrew Bailey, now the governor of the Bank of England and quoted in Nicholas Megaw’s article, was so right when he said that maintaining the illusion that banking could be free encouraged product mis-selling.
Surely no one would expect their electricity company to supply free electricity, while relying on profits from activities such as insurance sales, service contracts and penalties for late payment to cross-subsidise the cost of providing the core product. Why do we expect the banks to behave this way, except for the fact that personal customers have become addicted to not paying for the core services of payment processing, cash handling and keeping money safe.
The “free” banking model is inefficient, because customers have no price incentive to operate their accounts economically. For example, they can make numerous small cash withdrawals regardless of the processing cost. Worse, the ways that the banks have sought to recoup costs have caused suffering to numerous customers facing punitive interest and charges for becoming overdrawn. The staggering costs of mis-selling disasters, of which PPI is but the largest, have adversely affected the pension savings of thousands by their impact on bank valuations, dividends and share prices.
The banks all charge the same price (ie nil) for core current account services. This means there is in practice no price competition.
Indeed there is very little real competition of any kind for what is a utility service. Does this not open the door for the regulators to step in and administer some strong medicine to help solve the problem once and for all?
Adrian Lloyd
Solihull, West Midlands, UK
