(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
By George Hay
LONDON, May 24 (Reuters Breakingviews) - Andrew Bailey has a point. The UK’s chief bank regulator-in-waiting has taken aim at one of the peculiarities of Britain’s retail banking system: customers generally do not pay for services like current accounts, using cash machines and writing cheques. As Bailey notes, this perpetuates the UK’s banking oligopoly. It is also fiendishly difficult to unwind.
Large UK banks spend billions of pounds a year on their domestic payment systems. When interest rates were well over 10 percent in the 1980s, lenders financed this by paying very little for deposits and deploying the surplus cash. As rates have fallen, however, this income has dried up. Instead, banks now impose eye-watering charges on unauthorised overdrafts. They have also focused on plying customers with duff products like Payment Protection Insurance - now the source of huge compensation claims.
This system is regressive and opaque. The logical solution would be to follow the example of many banks in continental Europe, which tend to levy a monthly charge for current accounts. But such a seemingly regressive move would cause a huge political stink that an already-unpopular industry can ill afford. Besides, the first bank to act would risk losing angry customers to its competitors. Any co-ordinated action would look like collusion.
If regulators imposed some minimum charge they would face a public and political outcry. But if they cap the overdraft charges that banks can levy, they would achieve two goals. First, they would look tough. Second, lenders would be forced to find other ways to fund their payments systems, giving them an incentive to charge.
Banks could then start “nudging” their customers. The right to not pay for basic banking services could be preserved. But banks could gradually introduce some fees, while simultaneously offering customers the opportunity to avoid those fees in return for a flat charge.
Combined with curbs on cross-selling useless products, this might look too much like regulators dictating banks’ business models. But as Bailey seems quite aware, solving the conundrum of “free” banking may only be possible if a few sacred cows are put to the sword.
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- Reform of UK banks cannot proceed unless the issue of free in-credit banking is addressed – and this may require state intervention, the chief UK bank regulator-in-waiting said on May 24.
- Andrew Bailey, who will take on a senior role at the Bank of England’s Prudential Regulatory Authority in July, described free in-credit banking as a “dangerous myth”, because it meant consumers pay for banking services in ways that are hard to link to the costs of the products they receive.
- In a speech to the Westminster Business Forum, Bailey warned that free in-credit banking distorted the supply of banking services, and may have encouraged the mis-selling of bank products.
- However, Bailey stated that reform could not happen spontaneously. A bank that started charging transparently rather than via more opaque fees could lose customers, while if the industry moved in step it would appear to be collusion. Hence he said intervention in the public interest could be required.
- Bailey speech: here
- Reuters: BoE's Bailey says free banking may have to end [ID:nL1E8GO34L] - For previous columns by the author, Reuters customers can click on [HAY/]
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