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.

Jeremy Corbyn speaks to the media as he leaves a radio hustings on August 25, 2015 in Stevenage. Photograph: Getty Images.
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Corbyn's compromises show that he isn't so different from his rivals

The Labour leadership frontrunner is a politician after all. 

Jeremy Corbyn is lauded by his supporters for his honesty and conviction. His repudiation of the shabby compromises and realpolitik of Westminster. With no less fervour, he is denounced by his opponents as an unreconstructed ideologue, a man allergic to compromise. But as the Labour leadership contest reaches its denouement, the frontrunner is showing his pragmatic side. 

Having declared his support for British withdrawal from Nato ("I'd rather we weren't in it," he told the NS), Corbyn acknowledged at yesterday's Mirror hustings that there wasn't "an appetite as a whole for people to leave" and that he would instead call for the body to "restrict its role". The next Labour manifesto, should he oversee it, will not oppose membership (even the "longest suicide note in history" did not). Corbyn's compromise should not come as a surprise. Senior MPs told me that it would be all but impossible for him to find a shadow foreign secretary prepared to advocate withdrawal. On Tuesday, Andy Burnham, one of the few senior figures prepared to serve under the left-winger, had declared that he would resign rather than oppose membership. On this issue, Corbyn has shown that he is prepared to reach an accommodation with his colleagues and, more significantly, with the electorate - the act for which his rivals are condemned. 

Nor is this the first time that Corbyn has put pragmatism before principle. After refusing to rule out supporting EU withdrawal, he later clarified that "We cannot be content with the state of the EU as it stands. But that does not mean walking away, but staying to fight together for a better Europe." On the monarchy, the lifelong republican ruled that abolition could wait because "my priority is social justice" (another dreaded compromise with the electorate). If, as seems certain, Corbyn is elected leader, more trade-offs will surely follow. Once principles have been conceded a few times for reasons of electability or practicality it is harder to avoid doing so again. Corbyn, it turns out, is a politician after all. 

George Eaton is political editor of the New Statesman.