Why UK banking charges won’t stick

Headlines in the UK are lamenting the end of a long held British tradition of free banking. If you live in the US, Australia or anywhere else in the world for that matter you’d wonder what all the fuss is about. Doesn’t everyone pay banking charges?

Well not in the UK. It’s been a long established tradition that if your account stays in credit then you don’t pay fees for parking your money with the banks, nor do you pay for writing a cheque, ATM or transferring your money from account to account.

This agreement has served both parties well over the past few years. But people have short memories; it was only in the early1980’s that use of ATM’s where chargeable, as where other services that we now take for granted.

So what led to the ‘free’ banking revolution? Well, during the 1980’s the Conservative government under Margaret Thatcher liberalized the entire banking sector in a way no other country had seen.

Banks moved from working within strict regulations to being providers of services and sales outlets for services. The relationship between the customers was radically changed by the introduction of electronic banking transfers and eftpos transactions in the high street. Suddenly, banking became a less labor-intensive business.  In the ensuing years the banks closed branches and sacked staff. Decisions about overdrafts and loans were centralized and automated, the local bank manager for the branches that remained became an ‘uber’ salesman pushing high margin loans, mortgages, insurance policies and legal services onto customers.

Competition to sell more services to more customers led to offers to entice customers away from other banks – even though today you’re still more likely to divorce than move your bank account.

Thus the mantra of ‘Free Banking’ became the tag that got the most attention with the consumer. Over the last twenty years it has become the norm. The banks make huge profits from those who go into overdrafts or from exorbitant interest rate charges on affiliated credit cards. The mantra of free banking can still be shouted, but only for those who are really careful in their money handling.

Recently, there have been a series of changes and challenges to the banks over how they can charge penalty fees for some services. Ironically, those hit hardest are generally those who can least afford it. The government ombudsman for the industry is reviewing the way in which the banks are allowed to cross subsidize one service to another. Thus making it more likely that the banks will have to charge some flat rate fee for each service.

However, in the past twenty years banks have tried to introduce charges for various fundamental banking services, such as ATM cross charging – paying to use another banks ATM – but the public reaction has been so forceful that each time the banks have had to step down.

In many cases supermarkets have also put fear into the banks, offering services that were once the preserve of the banks. Supermarkets now issue the largest amount of cash to the consumer. In supermarket queues around Britain the phrase “cash back?” is uttered at each transaction – the supermarkets using the eftpos system to minimize their cash exposure and speed up the cash into their own bank accounts, cutting down ‘dead time’ of money and lowering transportation security costs.

The author recently spent some time in Australia and was surprised to see that people readily accepted paying for transactions, even though interest rates on cash and savings account where not significantly different to those of the UK. Australian’s take it for granted that they will pay – “that’s the way it is” is the oft-heard mantra in Australia about banking.

Speaking to a VP at the Australian bank Westpac a few months ago, the fear was that ‘British’ banking methods might be coming over to Australia as some of the British Banks seek to expand further. Other banks such as ING have already moved into Australia, with rich pickings awaiting the bank that ‘blinks first’.

Whilst some banks may throw out the occasional ‘sacrificial lamb’ to test the ‘free’ market – such as First Direct today – the overall competitive nature of the British banking system will keep all in tow.

Of course, the banks could all decide to all announce it together, but that’s collusion, and for that ‘sin’ the EU would take a hefty chunk of turnover and lock away a few execs.

So ‘Free Banking’ looks safe for the near term.