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.

Photo: Getty Images
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How can Britain become a nation of homeowners?

David Cameron must unlock the spirit of his postwar predecessors to get the housing market back on track. 

In the 1955 election, Anthony Eden described turning Britain into a “property-owning democracy” as his – and by extension, the Conservative Party’s – overarching mission.

60 years later, what’s changed? Then, as now, an Old Etonian sits in Downing Street. Then, as now, Labour are badly riven between left and right, with their last stay in government widely believed – by their activists at least – to have been a disappointment. Then as now, few commentators seriously believe the Tories will be out of power any time soon.

But as for a property-owning democracy? That’s going less well.

When Eden won in 1955, around a third of people owned their own homes. By the time the Conservative government gave way to Harold Wilson in 1964, 42 per cent of households were owner-occupiers.

That kicked off a long period – from the mid-50s right until the fall of the Berlin Wall – in which home ownership increased, before staying roughly flat at 70 per cent of the population from 1991 to 2001.

But over the course of the next decade, for the first time in over a hundred years, the proportion of owner-occupiers went to into reverse. Just 64 percent of households were owner-occupier in 2011. No-one seriously believes that number will have gone anywhere other than down by the time of the next census in 2021. Most troublingly, in London – which, for the most part, gives us a fairly accurate idea of what the demographics of Britain as a whole will be in 30 years’ time – more than half of households are now renters.

What’s gone wrong?

In short, property prices have shot out of reach of increasing numbers of people. The British housing market increasingly gets a failing grade at “Social Contract 101”: could someone, without a backstop of parental or family capital, entering the workforce today, working full-time, seriously hope to retire in 50 years in their own home with their mortgage paid off?

It’s useful to compare and contrast the policy levers of those two Old Etonians, Eden and Cameron. Cameron, so far, has favoured demand-side solutions: Help to Buy and the new Help to Buy ISA.

To take the second, newer of those two policy innovations first: the Help to Buy ISA. Does it work?

Well, if you are a pre-existing saver – you can’t use the Help to Buy ISA for another tax year. And you have to stop putting money into any existing ISAs. So anyone putting a little aside at the moment – not going to feel the benefit of a Help to Buy ISA.

And anyone solely reliant on a Help to Buy ISA – the most you can benefit from, if you are single, it is an extra three grand from the government. This is not going to shift any houses any time soon.

What it is is a bung for the only working-age demographic to have done well out of the Coalition: dual-earner couples with no children earning above average income.

What about Help to Buy itself? At the margins, Help to Buy is helping some people achieve completions – while driving up the big disincentive to home ownership in the shape of prices – and creating sub-prime style risks for the taxpayer in future.

Eden, in contrast, preferred supply-side policies: his government, like every peacetime government from Baldwin until Thatcher’s it was a housebuilding government.

Why are house prices so high? Because there aren’t enough of them. The sector is over-regulated, underprovided, there isn’t enough housing either for social lets or for buyers. And until today’s Conservatives rediscover the spirit of Eden, that is unlikely to change.

I was at a Conservative party fringe (I was on the far left, both in terms of seating and politics).This is what I said, minus the ums, the ahs, and the moment my screensaver kicked in.

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.