Friday, 3 December 2010

There's no such thing as free banking

John Varley, the outgoing CEO of Barclays, yesterday at the Independent Commission on Banking public meeting said that 'It is possible that free-if-in-credit banking is a structure that has outlived its time.' He described the concept as 'idiosyncratic by the standards of the world' and said it was worth examining.

This follows up the remarks made by the FSA Chairman Lord Turner that free banking damaged competition in financial services.

Whilst bankers may refer to 'free banking' and many consumers may believe that they have 'free' banking when in credit the reality is that banking is anything but free. All of us pay for our banking, but the charge is far from transparent. The fact that the banks either don't pay us for our credit balances or may pay a paltry 0.2%, but then lend out our balances to customers at much higher percentages is just one of the many ways that we pay for our banking services even when we are in credit.

Should the Independent Commission on Banking recommend the abolition of free-banking and the government implement their recommendation, then how would they make that work? Would they pass a law that organisations would be compelled to charge for cash withdrawals at an atm, for cashing a cheque, for paying a bill? A system where you pay for every transaction altready exists in Australia and has for some time, and to address Lord Turner's assertion that this will encourage more competition, there is an even higher concentration of market share amongst the Four Pillars (ANZ, Westpac, National Australia and Commonwealth Bank) than there is in the UK. Has the absence of free banking made that market anymore competitive than the UK - absolutely not. Indeed the Australians have their own commission on banking currently running that will report on its recommendations to create more competition in the Australian financial services sector later this month.

As a panacea to create more competition in banking the end of 'free' banking is not the answer. The only winners from the abolition of 'free' banking would be the banks. They are already actively encouraging more and more customers to pay fees for their 'value-added' accounts, as the banks look to boost the proportion of their income that comes from fees rather than interest, particularly when interest rates are so low.

Should the government persist in driving down that route, interfering with the free market by legislating the end of free banking (which is completely impractical), then consumers should be lobbying to ensure that the fees introduced are more than compensated for by the increase in interest that is paid by the banks for credit balances and the significant reduction in overdraft fees.

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