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Nic Cicutti: Which? ignores banking cross-subsidy dangers

Question: what is the most effective way to ensure misselling of a financial product will take place? Answer: by creating an environment where you need to cross-subsidise certain groups within your customer base at the expense of the rest.

For those of you who might imagine I’m talking about IFAs and life and pensions providers, rest easy. This week I want to talk about banks. Specifically, I want to talk about banks in the context of “free banking”, that great illusion we all talk about but so few of us actually enjoy.

In the past week or two there has been a lot of discussion as to whether free banking (I’ve removed the quotation marks) actually works. As former FSA consumer panel chairman John Howard reminded us recently, a range of senior City figures, including Barclays chairman Sir David Walker, FSA chairman Lord Turner and chief executive designate of the Financial Conduct Authority Martin Wheatley, have all come out against the idea.

John Howard accepted that getting rid of free banking would be incredibly unpopular and could have adverse political consequences in the current climate. He wondered whether, in a dying gesture designed to leave the new regulatory bodies with a clean slate, the FSA might introduce rules in the coming months to “force” banks to introduce charges for current account customers.

This would presumably involve requiring them to apply appropriate charges to each individual aspect of their banking operations, including current accounts.

Yet no sooner had Howard’s comments appeared in Money Marketing, than Which? chief executive Peter Vicary-Smith weighed in with his own counter-blast. In Vicary-Smith’s case, he took aim at those who suggested “that if the banks charge a monthly fee for current accounts this will prevent the misselling scandals of the past.”

Which? has recently carried out research which “proves” that free banking is a myth – a conclusion most of us who have worked in financial services journalism, or the wider industry for more than 30 minutes could have told our pals in Marylebone Road.

The way banks make their money, according to Vicary-Smith, is by “paying hefty fees for such basic services as withdrawing and spending cash abroad”, as well as excessive charges on their overdrafts and “lost interest” on their savings.  

He therefore dismisses any suggestion that banks should charge for operating a current account: “This suggestion is completely ridiculous and a damning indictment of the current culture of the banking industry. Consumers should not be forced to pay even more when the banks have let us down so badly.”

The Which? position is that banks are making healthy profits, so why add to them by collectively free banking, whether at the request a regulator or otherwise?

Like many Which? arguments, this one has the strong whiff of populism about it. How could it not? Throw in a mention of PPI misselling and the Libor fixing scandal, add a reference to the banking crisis and you can just see how the debate is going to play out.

Yet what is interesting about Vicary-Smith’s comments, also in Money Marketing, is that they don’t engage at all with a central aspect of John Howard’s own case – namely that the cross-subsidy that allows banks to offer so-called free banking to some of their customers comes disproportionately from the less-well off.

In other words, millions of students, of low earners, those in severe financial difficulties and the less financially astute are contributing towards the billions of pounds needed to ensure that the rest of us, who get bank statements every months, access to web accounts and telephone banking, access to thousands of bank branches and all the processing involved in running our accounts, pay nothing whatsoever for these services.

I can see how such a state of affairs can be highly attractive to the average Which? magazine subscriber. Generally more affluent and financially aware than the average consumer by definition, they are the ones least likely to run up overdrafts every month, for which they will be forced to pay through the nose.

When they go abroad or their nice summer break in the Dordogne or the Italian Lakes, they are most likely to take Which?’s advice and go armed with a card that doesn’t charge for overseas purchases – did anyone mention Saga? The chances are they will probably even know about dynamic currency conversion, bless them.

But for the vast majority of the population who haven’t quite got round to subscribing to Which?, maybe because they can’t afford it, the idea that they should be paying for Vicary-Smith’s members to enjoy their freebies is not quite as attractive.

Where Which? is entirely correct is in its argument that ending supposedly free banking won’t end misselling. For that, we need much tighter regulation of the banks – with heavy penalties personally levied on individual directors who failed to ask the right questions about the way their operations are run.

Yes we also want full charges disclosure from banks, I’m with Which? on that. But once we have it, we need to face up to some unpalatable facts. And one of them is that to maintain the current system, where the poor subsidise the better-off, allowing banks to hide the true cost of operating a current account, is not tenable either.

Nic Cicutti can be contacted at:


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There are 9 comments at the moment, we would love to hear your opinion too.

  1. Sorry Nic, the illusion of free banking is also paid for by the massive difference between interest rates for borrowing and saving.

    If charges were introduced all that would happen is that those who manage their finances well would start paying for the privilege of using a bank and those who dont will end up paying even more.

  2. John Szymanowski 30th August 2012 at 10:09 am

    Will charging a monthly fee on operating bank accounts stop the banks from ‘overcharging’ on overdrafts,foreign exchange,money transfers etc.Moreover what about the huge spread -difference between saving and borrowing rates -will that narrow with the introduction of monthly fees?
    Comrade Nic’s argument is a very populist one that the less well off end up ‘subsidising’ the well off . Sorry Nic but life’s unfair – why should ‘well off’ people cross subsidise those profligate customers who don’t understand that you can’t spend what you don’t have-nothing whatsoever to do with holidays on Italian lakes.

  3. I think it a little naive that the introduction of charges will change anything – other than the profits of Banks. Afterall, will the removal of ‘free banking’ mean that overdrafts and other charges will be cheaper for the ‘millions of students, of low earners, those in severe financial difficulties and the less financially astute’. I think not. Therefore the situation of ‘cross subsidy’ will still exist with the added cost of additional charges adding to the Banks bottom line – but from everybody. We all know that the banks take our cash and lend it out at a huge mark up. Why not, then, hand some of it back in the form of a decent interest rate? And not the piffling rates that some of us get? Seems fair to me. No, the end of ‘free banking’ is not going to change a thing, mis-selling or otherwise.

  4. As others have already pointed out and as Nic admits, there never has been ‘free’ banking. For those in credit the interest rate paid has (if at all) been derisory. Therefore the banks use our money while paying around Zero to 0.2% interest and lend it out at around 14%.

    That those in debt with loans and overdrafts pay for this facility seems perfectly reasonable. Consider that without the savers (who generally outnumber borrowers 3:1) the indebted would not be able to avail themselves of the facility.

    If the clearing banks fondly imagine they can start charging the prudent for handling their money they may well be in for a shock. Unless we are going to have a command economy there will be a new entity (Metro Bank – or some such) who will offer ‘free’ banking for those in credit. The problem is that no one bank can go it alone and if they act in concert they may well come up against the Monopolies Commission.

    As it is with the advent of internet banking most high street current accounts are merely for petty cash, while the ‘meaty’ amounts get transferred to higher interest paying accounts elsewhere. Nowadays interest rates of 3.2% – although still poor by historic standards and compared to inflation – are not uncommon. Moreover for the assiduous there will always be free banking. Payments could be made by credit card – for those of us who settle in full there is no charge. (That’s why those that don’t pay 19% interest). Receipts can go straight into a high interest account – again for which there is no charge. Cash will become more popular for smaller transactions and will no doubt enhance the Black Economy – no doubt much to the joy of Mr Osborne! As far as the banks are concerned they are in danger of losing their solvent customers and I can’t see them standing still if this happens.

    The other danger of course is that the fee for the account will include all sorts of extraneous benefits which are not asked for or required and which may well at some future time be categorised as a mis-sale.

    Nic, you and the others need to accept that you can’t ‘put the Genie back in the bottle’. We now live in a very competitive world and there will always be ways for the solvent to take advantage – maybe even at the expense of the insolvent! Such is life.

  5. Our whole financial system is based on cross-subsidy. Two basic examples (and there are many) is insurance, where those who do make claims subside those who do. Taxes are where those who pay the most subsidise those who take out the most in benefits. I do not consider these to be unfair practices..

    To suggest that cross subsidy is now a cause of what is effectively fraud by highly paid bank staff (at least at the top of the organisations) and highly profitable banks is just ridiculous.

    If we are to look at cross subsidy, then lets look at it in all its forms and properly consider all its benefits and disadvantages for all parts of society, rather than in the narrow context of banks trying to boost their already high profits so that their staff can take even higher bonuses on top of high salaries and at the same time indulge in and promote dubious tax avoidance schemes.

  6. Don’t often find myself agreeing with Nic and even less often with Which?
    Misselling from Banks would only stop if they genuinely built long term relationships with their customers and didn’t regard them as ‘conquests’ (a la Press reoprts last year). There is a world of difference between retention / inertia and a genuine relationship and as the latter will never happen because it is often not profitable quickly enough, misselling will not stop for all the ethics exams and disclosure on this earth.
    As ‘transparency’ is so in vogue at the moment why not have some? It will raise costs for all but hey, utopia has to come at a price I suppose. Why not have a charge for a DD, cheque etc…., let’s go the whole hog and show each customer what they pay towards their regulation (you know that comfy notion that has been so successful it had Banks within hours of running out of money five years ago and probably only kept afloat by the PPI sales that have been going on for years) and the FSCS ‘compo’ fund too whilst we are about it? But then the ‘Twin Peakers’ may find themselves a tad less popular than they are already and the consumer paying more costs (never seems to concern those on those lofty peaks though). Transparency is a lovely notion but consumer and regulator alike need to be careful what they wish for…….

  7. I do find it bizarre that the maximum commission agreement which was designed to stop excessive commission payments being stripped out of clients funds was deemed anti competitive and illegal, but a minimum charge which must be taken from curtomers accounts is only fair and just.

    Surely two sides of the same coin. Perhaps it would be much more straightforward if rather than imposing charges, the banks simply terminated the accounts of those incapable of running their affairs properly, and just used the margins between lenders and borrowers to run the simplified business (rather as building societies do – no facility for overdrafts there).

  8. It’s touching that Nic is so concerned about poor people but he seems to be missing the impact that charges would have.

    Imagine that you are on benefits that now have to be paid into a bank account or you are low paid. The £10 a month bank account charge will be like a reduction in benefits or a hefty new tax.

    Introduce charges for bank accounts and watch as the low paid and those on benefits insist on cash. Watch a significant part of the economy go underground as a fair proportion of people simply reject banking and lose all the services and opportunities that it provides.

    They will be trapped and that will benefit no-one.

  9. @ Soren Lorenson: forget for a moment your apparent amazement that I care about poor people (why wouldn’t I?), you also seem to have in mind a £10 monthly charge to run a basic bank account. Where did you pluck that sum from?

    From that bizarre premise to then conclude that the low paid and those on benefits will insist in being paid in cash, are you not aware that the poorest in society already have no bank accounts? And if anyone wants to be paid in cash, that’s their right surely?

    As for some of the other posts, yes cross-subsidies are common throughout financial services, but they usually involve some form of risk-factoring, even if limited – and they don’t expect the less well-off to subsidise the better-off.

    Interestingly, none of the comments above deny that is precisely what we have with supposedly free banking at the moment. So my two questions to all of you is: is it fair? And what do we do to end it?

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