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.

Getty
Show Hide image

Grandpa was ill and wasn’t keen on climbing the volcano – but we forced him up all the same

I squinted. Apart from a gleam of turquoise, the view was of one big cloud. Slowly the words started to form in my head. Just. Like. Scotland.

At first, Grandpa was sceptical about the volcano. “I used to be into that kind of thing,” he said, “but not now.” He did not mention that he was 88.

The guidebook to Indonesia – which he disdained – described how, once you got to the crater, the mist would rise to reveal a shimmering lake. His fellow travellers, my sister and I, often joked about our family’s tendency to declare everything to be “just like Scotland”. This was a living, breathing volcano. It would be nothing like Scotland.

But as Grandpa reminisced about his childhood in the Dutch East Indies, he began to warm to the idea. We set off at 7am and drove past villages with muddled terracotta roofs and rice paddies spread across the valleys like glimmering tables. We talked excitedly about our adventure. Then it began to rain. “Perhaps it will blow over,” I said to my sister, as the view from the windows turned into smears.

Our driver stopped at a car park. With remarkable efficiency, he opened the doors for us and drove away. The rain was like gunfire.

To get to the crater, we had to climb into an open-sided minibus where we sat shivering in our wet summer clothes. Grandpa coughed. It was a nasty cough, which seemed to be getting worse; we had been trying to persuade him to go to a pharmacy for days. Instead, we had persuaded him up a cold and wet mountain.

Five minutes passed, and the minibus didn’t budge. Then another bedraggled family squeezed in. I thought of all the would-be volcano tourists curled up in their hotels.

“Look,” I said to the attendant. “My grandfather is not well. Can we please start?”

He shook his head. “Not till all seats are full.” We exchanged a glance with the other family and paid for the empty seats. The driver set off immediately.

The minibus charged up a road through the jungle, bouncing from puddle to puddle. Grandpa pulled out his iPhone and took a selfie.

The summit was even colder, wetter, rainier and more unpleasant. We paid a small fortune to borrow an umbrella and splashed towards the lake. My sister stopped by a fence.

“Where is it?” I said.

“I think . . . this is it,” she replied.

I squinted. Apart from a gleam of turquoise, the view was of one big cloud. Slowly the words started to form in my head. Just. Like. Scotland.

I thought remorsefully of the guidebook, how I’d put my sightseeing greed before my grandfather’s health. Then I noticed the sign: “Danger! Do not approach the sulphur if you have breathing problems.”

Grandpa, still coughing, was holding the umbrella. He beckoned me to join him. I didn’t know it then, but when we made it back to the car, he would be the first to warm up and spend the journey back telling us stories of surviving the war.

But at that moment, in the dreich rain, he gave me some advice I won’t forget.

“If anyone tells you to go and see a volcano,” he said, “you can tell them to fuck off.” 

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines. 

This article first appeared in the 23 March 2017 issue of the New Statesman, Trump's permanent revolution