Thursday, 18 August 2011

One more step towards the end of "free banking"

The announcement by state-owned RBS (Royal Bank of Scotland) that it would join minority state-owned Lloyds Banking Group in restricting the access of its basic bank account customers to only its own ATMs is yet one more step on the road to the end of so-called "free banking" in the UK.

Basic bank accounts are, as the name implies, a checking account where no overdraft is allowed and only a debit card can be used. They were introduced as part of a government initiative to reduce the number of unbanked and all the major banks were leant on to provide them as part of their contribution to society. Without access to more profitable products such as loans and overdrafts and amongst the high users of branches for transactions (attracting further costs for the banks) these are unprofitable accounts for the banks to run and have little potential to move towards profitability. In a pure commercial world these are the types of customers that banks would encourage to join other banks. It is therefore no surprise that neither RBS or Lloyds Banking Group would not want to incur interchange fees for these customers using non-RBS or Lloyds Banking ATMs, particularly as they are not able to pass those costs on to their customers.

With the increasing clamour for more transparency around bank charges it is almost inevitable that the concept of so-called 'free banking' will end and it will be the less well off, such as basic bank account customers, who are currently subsidised by those who hold large balances in their current accounts, will be disproportionately impacted by the introduction of fees.

As the Independent Commission on Banking finishes off its report they need to be aware of the implications of getting what they are asking for, particularly on the least well off.

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