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The myth of ‘the myth of free banking’

I was genuinely astonished to read that Which? had “shattered the myth” of free banking.

Not because the research the consumer body published earlier this week contains any new information or revelations. I just do not think this myth exists.

There is certainly little in the headline claims from Which? about overdraft charges that the average man or woman on the street would not be aware of.

For example, the reports key finding is that if you go into the red without telling your bank, they will charge you. I reckon most people know this. The consumer body’s research quotes some big numbers for these charges – up to £900 a year – but this is based on someone who is overdrawn two days a month without permission.

This seems an extreme example. No information is given on how many people actually experience charges of anywhere near this figure, but I would be surprised if it is many. The full Which? article raises a valid point about the difference between the top charge of £900 a year and bottom charge of £120, but unfortunately this is not the focus of the research.

The report also cites charges on RBS/Natwest and HSBC accounts with an overdraw facility of 19.9 per cent APR. I know this is accurate because I am a HSBC customer and have dipped into my overdraft on numerous occasions.

Whether this charge is exorbitant is open to debate – Which? points out that it is higher than many credit cards and personal loans – but it is certainly not a secret. HSBC clearly tells you about it when you sign up and its online banking facility explicitly details in pounds and pence how much it has cost you to be overdrawn each month. Banks are an easy target and may be bad at some things but to me this seems like good, clear disclosure.

Which? also argues that current account customers are missing out on interest they could earn elsewhere. While my old sixth form economics teacher Mr Rouse would have revelled in this ‘opportunity cost’ argument, it is not a charge on the customer.

Whether or not the way bank charges are levied could be improved is a worthy debate. In my view, the current system is broadly a good one – it rewards people who do not spend more than they have and charges those who do. This is certainly preferable to a flat charge across customers which would effectively see those who are not overdrawn subsidise people who are.

But by attacking the supposed “myth” of free banking, an argument which centres on banks’ disclosure of charges and consumers’ awareness of them, Which? has turned its guns on the wrong target.

Tom Selby is a reporter at Money Marketing- follow him on twitter here


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There are 13 comments at the moment, we would love to hear your opinion too.

  1. Tom, thanks for a bit of much needed fresh air and common sense in this topic. Sometimes I feel like if I come from Mars and I am the odd one.

    There is also the point that free bank accounts encourage misselling. In essence, it is like saying that a free toy for my child in a Happy Meal will encourage to misselling in the McChicken.

    The Big Fish

  2. All this argument on current account fees and charges misses the main point. If anyone thinks the charges for overdrafts and insurance pays for the staff, buildings, computer systems, cash handling etc they are misinformed.
    If I have £3,000 paid into my account per month and spend it all by the end, my average balance is £1,500. They can lend £1,200 to others five times over, or even invest in loan stock and still retain a safety margin. Think of the income from those loans and investments. That’s why the ex building societies have been buying current accounts for years, and moan that people rarely switch.
    If in credit, the facilities provided by a current account are free. The reason banks now are pushing for fees is they are greedy. They have been hit in the pocket by product misselling and now want extra income to compensate.

  3. Tom making sense. Which? doing their best to drum up some publicity for themselves, little of merit in what they have to say on this subject. The wider concern is that the big banks are trying to cosy up and say charges are a good thing. Even the regulator seems happy to back them.

    The lack of competition here is the underlying issue, one bank will not move without the others following as those of us who keep our banks permanently in funds with an interest free loan, will switch to a free bank and the current high overdraft fee payers can stay where they are.

    The new entrants such as M&S money are charging a monthly fee, if thye grow despite this, free banking is done for .

  4. Quite agree with Tom, I have no problem understanding any Bank charges as every month they send me a statement with all the potential charges clearly outlined.
    I gave up on Which years ago, nowadays to my mind they are just another publicity seeking outfit with little to say of relevance, most reports just state the “B……. obvious”

  5. Michael Wainwright 23rd August 2012 at 1:01 pm

    Well done Tom – a bit of truth. I was astounded to hear that there was no such thing as a free bank account when I know full well that I have two of them, from two different banks. Who cares if the banks charge heavily when client go overdrawn without permission? Serves the clients right. Loss of interest on my account? That does not stop it being free and I can not think of anywhere else I can put my money where I can have standing orders, withdraw at a moment’s notice and as often as I like, make cheque payments and all at no charge. I reckon my bank accounts are jolly good value for money. Long may the current system continue.

  6. I agree completely with you Tom- I know exactly that each time I go into my overdraft it will cost me £1 per day- so I do not go into it full stop. It is only there for absolute emergencies. I realise that it can sometimes be hard to money manage, but I have everything set up with one bank and never pay any charges, and as a bonus get a (small) reward at the end of each month. Its fairly simple! People really need to start looking at themselves rather than trying to pass the blame on and making excuses.

  7. This is a very sensible and almost well-written article. Presumably Tom had some help from the editor with the longer words.

  8. I disagree. This is not sensible at all. In fact it’s rather silly. Although I agree it’s almost well-written. Or almost all of it is. Apart from the longer words, which I don’t understand.

  9. The problem is the word free in all of its forms and uses it comes up short e.g. Free transfer what’s free about the wages that come with the player. Its even worth when used in promotions or slogans or both. Like the large bill poster adjacent to a petrol station at the time of apartheid stating FREE Nelson Mandela underneath was sprayed “with every six gallons”! Like I say ban the word FREE

  10. As a mere consumer, I too fail to see how making me pay for something that I currently receive without charge protects me from detriment.

    Perhaps “Which?” should be renamed “What?”

  11. Just stop and think for one moment. In an era where many UK banks are heavily indebted [bust] and without profits being generated by the high risk investment bank activity, how on earth can retail banking ever be ‘free’?

    I grant that if you don’t buy any other product and keep your cuurrent account in the black, there is no direct charge but…How many people do this, or rather how many people don’t?

    Free banking is a myth, the banks expoit the data they derive from your account activity to cross sell whether in the red or black, just as Tesco does when using its reward scheme.

    Nothing is free, someone always pays!

  12. Hello Darlings!

    It’s all about TAX.

    Fees on bank accounts = VAT to HM Treasury!!!

    It’s got nothing to do with protecting the consumer but everything about increasing the revenue collected by HM Government.

    Has nobody except little old me figured this out yet?

    So, yes the FSA will stop at nothing, even telling a pack of lies, to further its socialist agenda.

    That’s what socialists do.


  13. Duncan – while of course you are technically quite correct, personally I’m in that group that was brought up to deal with your affairs properly and therefore have never been overdrawn or paid bank charges. And I do mean in over 40 years, never.

    Whilst I do appreciate we all have varying abilites, apart from the odd oversight, it doesn’t seem that onerous to stay on the right side of the balance sheet. I don’t see why it’s any more acceptable to go overdrawn without permission than it would be to dip one’s hand into a freinds pocket, without at least asking permission beforehand.

    I guess in general the French manage it somehow given the potentially more serious issues one might face over there.

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