Reality 2: The end of free banking - Video transcript

Simon Westcott

The UK’s free banking model first emerged back in around 1984, when one bank broke ranks with the rest of the industry and dropped a lot of its fees on current accounts. Lots of customer switching followed, and the rest of the industry was effectively forced to follow suit. If you fast-forward to 2012, the predominant model across the UK retail banking system remains free banking, so whether that’s free-if-in-credit current accounts, or no annual fee credit cards. We believe now that this model is no longer sustainable, so by international standards, this model is unusual and if not, unique, and we think that 2012 will bring some significant changes to that.

The central issue with free banking is that of course it isn’t actually free, and over the last 20 years or so, as the model has become less sustainable, banks have sought to recover their revenue through other arguably less transparent means. And while consumers don’t always make the linkages between the free banking model and the negative consequences of it, I think the issue is demonstrated more broadly by the fact that over the last 20 years or so, the industry has had to pay out around £15 billion in compensation to its customers, and complaints to the Financial Ombudsman have increased to around 200,000. And all of this is a symptom of the fact that consumers are not clear about what and how they are actually paying for their banking services.

We believe that it’s both in the consumers’ and the industry’s interest to move to a much more transparent fee-based model, and I think that that’s clearly a very difficult transition to make. Consumers perceive that banking is free, and therefore remain very wedded to the current model. And for banks, of course, there’s a big first mover question around who moves first, and what impact does that have on the industry. But, you know, we think that although these issues have been bubbling for some time, some of the changes that are happening in the industry will start to accelerate change.  So for example, changes to the competitive landscape within retail banking, recent measures announced by the Independent Commission on Banking, will come together and be a powerful catalyst for change.