Should we end free banking?

Andrew Bailey, the Bank of England's Executive Director, spoke today on the future of UK banking, and argued that we nede to tackle "the dangerous myth of free in-credit banking".

Bailey told the Westminster Business Forum that:

Free in-credit banking in this country is a dangerous myth. It is a myth because nothing in life is free; rather, it means that we pay for our banking services in ways that are hard to link to the costs of the products we receive. This can distort the supply of banking services. The dangers include that the pricing of banking to consumers varies too much depending on the services they use. I also worry that the banks may not properly understand the costs of products and services they supply. And I worry also that this unclear picture may have encouraged the mis-selling of products that is now causing so much trouble. In short, I think that the reform of retail banking in this country cannot move ahead unless we tackle the issue of free in-credit banking, and have a much better sense of what we are paying for and how we are paying.

Bailey is, of course, right that "free in-credit banking" is a myth. Almost every current account on the market pays zero, or close to zero, interest on accounts in credit, while inflation stands at 3.0 per cent. As a result, if you have a current account, you are in effect paying the bank close to 3 per cent of your deposit each year for the privilege.

It may even be, as Bailey suggests, a dangerous myth. After all, when the amount one is "paying" is contingent on the rate of inflation, it can be very difficult to keep track of what that actually is at any one point; in addition, many people don't have a full understanding of how inflation and interest rates combine, meaning that they do indeed think they are paying nothing at all for the service.

More importantly, the desire to extract extra profit from customers is a large part of what has led to the proliferation and inflation of bank charges. If a bank cannot charge customers a monthly fee for using their account, one way they get around it is by charging a fee for the sort of honest mistake which happens quite regularly; not only fees relating to overdrafts and rejected payments, but also returned letters, mistaken transfers, and suchlike.

But if his diagnosis is correct, I'm not so sure his cure is. While it is true that explicitly charging for accounts will allow banks to charge for their core services, rather than having to make most of their profit at the margin, it doesn't seem so clear that that will lead to better behaviour. Just this year, for instance, the Bank of America, which already charges fees for most services from its accounts such as withdrawals, transfers, and cheque cashing, attempted to introduce a $5 monthly fee for having a debit card.

Banks take advantage of the reluctance of customers to switch by nickle-and-diming on anything they can get away with. While they may find it easier to do so if the charges are less obvious, the last thing they need is state intervention to allow them to charge even more. Let  what little competition there it have the intended effect.

Andrew Bailey (R) presents a giant novelty £10 note to Sarah Darwin. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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The hidden joy of charity shops

Mary saw her colleagues at the charity shop every day, but she didn't tell them she was sleeping on the 31 bus.

Camden is a bric-a-brac kind of place – market stalls, blaring music, occasional offers of weed. But the back room of the Sue Ryder charity shop on Parkway is immaculate, with hooped petticoats waiting to be steamed and crockery stacked neatly on the shelves. I’ve come to talk to the shop’s manager, Oya, and one of her volunteers, Mary*, and they are waiting for me with milky tea and chocolate-chip cookies.

Mary is nervous. She is afraid of having her real name printed. “It’s shaming to tell you my story but I believe if I tell people at the right time, good things will happen,” she says. Now in her fifties, she arrived in Britain four years ago from Italy, without friends or savings, having left her husband. The jobcentre gave her an Oyster card and told her to volunteer at a charity shop to improve her English. “So we put her on the tills,” says Oya. “That’s what we do with anyone who gets sent to us to learn English.”

But Mary had a secret. She couldn’t find anywhere to live, so every afternoon, when she finished her shift at the shop, she would go to the jobcentre and laugh and joke with the staff there to cover up the reality that she didn’t have anywhere else to go. When the jobcentre closed, she would ride the 31 bus through the night, from White City to Camden and back again. It was the best way to stay warm. Then, every morning, she would arrive at the shop early, brush her teeth in the staff bathroom and change into fresh clothes – washed in a friend’s hostel room. No one else knew.

The charity Crisis calls people such as Mary “the hidden homeless” and says that it is almost impossible to estimate how many of them there are in Britain today. Most homeless people don’t qualify for accommodation in shelters but eke out their time shuttling between friends’ sofas, insecure rented accommodation, bed and breakfasts or sleeping rough on the streets.

Eventually, the shop manager – Oya’s predecessor – asked Mary what was wrong and her story tumbled out. Between them, with help from the jobcentre staff, Mary found a studio flat and moved from volunteering on the tills to working at a nearby convenience store, where she is now a supervisor. Both she and Oya have to stop to reach for tissues while telling me this story. “Sue Ryder is my family,” says Mary. “Sometimes I want to cry but there are no tears left. And Allah would be angry if I dared to cry now, with all that I have.”

Despite having a paid job, Mary still volunteers at the charity shop on Friday mornings. She leaves at 3pm to work the evening shift at the convenience store. She and Oya are firm friends outside work. Mary brings in home-cooked lasagne for Oya and her daughter – “She says, ‘Eat some tonight, freeze the rest for Ella’” – and Oya invites her round and cooks her Turkish food on Friday nights. “She’ll say working here saved her life,” says Oya. “I’ll say I made a friend for life.”

The reason I’m here is a selfish one. Volunteering for a charity is the perfect antidote to a culture that can often feel mercenary, cynical and ruthlessly individualistic. I wish more people did it. I’m also here because in December, I wrote a piece defending charities from accusations that many do not turn every penny of donations into outlay on their projects. But running charity shops requires upfront investment – on electricity, rent and wages – so it’s too simplistic to demand that all the money they receive should go straight back out of the door.

That article prompted the management of Sue Ryder, which operates 457 shops with 12,000 volunteers, to get in touch and invite me in. Some of their volunteers, like Mary, need to learn English and other skills before they can get a paying job; some are serving prison sentences; others are youngsters sent unwillingly by their schools for work experience. (Jackie, who now manages one of the charity’s shops in Aberdeen, had previously been imprisoned three times.)

Not that everything is rosy in the charity shop back room. Oya says that some people use them as a “dumping ground”. I tell her that I once read a story about a donation of tights that had a used sanitary towel still stuck to the crotch and they nod: “We had that.” Oya is very proud, however, that the store “doesn’t smell like a charity shop”.

As well as providing jobs and raising money, stores such as this one provide a useful social barometer. There are around 9,000 charity shops in the UK and their number rose 30 per cent in the five years following the financial crash of 2007. Since then, the economic downturn has increased trade significantly. Last year at the shop in Camden, the number of donation bags increased by 52 per cent and takings went up by 8 per cent, yielding a net profit of £65,000.

In Camden, close to chichi Mornington Crescent and Primrose Hill, the donations can be eyewateringly expensive (recent finds include a £1,200 clarinet and a £980 Prada handbag), while the cheapest brands stocked are Marks & Spencer and Next. “More people are charity shopping,” says Oya. “And not the people you’d expect. They’re suited and booted. Sometimes they’re famous.” Mention is made of an EastEnders actress spotted in the store.

Because of her work, Oya has been invited to a garden party at Buckingham Palace on 12 June and naturally she is taking Mary. A trip to buy hats is coming up and their enthusiasm is infectious. Here in the back room of a north London charity shop, as the three of us – a Turkish-British Muslim, an Eritrean-Italian Muslim and plain old white agnostic me – drink milky tea, I feel the most British I have all year. These guys really love the Queen. And they love being friends. Stepping out into the sunshine, my overwhelming feeling is: maybe we’re all going to be OK.

*Her name has been changed

Helen Lewis is deputy editor of the New Statesman. She has presented BBC Radio 4’s Week in Westminster and is a regular panellist on BBC1’s Sunday Politics.

This article first appeared in the 19 May 2016 issue of the New Statesman, The Great Huckster