The end of free banking could be an opportunity for other financial institutions

Building societies and credit unions stand to benefit if we move towards a paid-for model.

While many of us start to recover from the shock revelation that charge-free bank accounts are a myth, and that banks have been incentivised to mis-sell other financial products for their loss-leaders, some financial institutions like building societies and credit unions are quietly looking forward to the end of free banking.

After the scandals that have hit banks over PPI misselling and the £9bn set aside to recompensate those who were its victims, bankers and regulators have shared a rare platform in agreeing that an end to free banking could prevent similar future episodes.

The argument goes that banks were only scheming because fees aren't being levelled towards customers for their accounts, and so inevitably it became necessary to cross-subsidise from one profitable bit of the operation to in-credit personal current accounts free of charge.

Indeed as the newly-appointed chairman of Barclays, Sir David Walker, has said: "Because banks are not charging, it drives them inexorably into this sort of position”.

The issue has been raised in parliament and will be raised again at the Parliamentary Commission on Banking Standards where bankers have already submitted evidence, highlighting free banking as one of the things that led to bad behaviour.

One of the practical problems that awaits this (some call it an inevitability) is if one bank makes the leap and starts charging, the likelihood is that their customers will run and go elsewhere. To be a renegade over this can promise a huge money loss, which undermines the point in doing it in the first place - some risks just don't come naturally to banks.

Of course the other problem is that if it became a trend among banks, nobody can promise against an outbreak in customer dissatisfaction. One of the concerns being raised is that for unethical banking, the general public is being asked to subsidise another income stream for Barclays, HSBC, RBS and Lloyds.

For Phillip Inman, economics correspondant of the Guardian and the Observer, this is like a pickpocket saying he was forced to steal wallets because he was denied other sources of income. The only way of stopping a naughty banker from selling you stuff you don't need, in other words, is by giving him money. One can understand the discontent at this twisted logic.

But from another angle some institutions are seeing an opportunity. While one of the appealing planks of David Cameron's big society was the building up of smaller financial institutions, realists could see the many market entry barriers for types like building socieities and credit unions.

While the mainstream is already occupied by big banks, it was discussed at the KPMG’s 22nd annual Building Societies Database recently that: “almost half of the UK’s 47 financial mutuals had increased their profit in the year to April 2012, and that they would benefit further from the end of free banking.”

This isn't the first time I've heard something similar. Speaking to someone recently who works close to the credit union industry, who preferred to go unidentified, they told me that Barclays' talk of transparent charging structures has made the prospect of credit union modernisation very interesting indeed.

Credit unions have always had such a structure, and if paid-for accounts led to more competition among smaller players then the notion of a credit union membership rise increases the chance of them lending more money, particularly to those who are currently having difficulties remaining creditworthy or are thinking about going to a payday lender.

Trouble is the paid-for model comes with many problems. Too many, perhaps. People don't want to be charged a fee. Customers may end up kicking up a fuss about who their banks lend to on the grounds that their fees subsidise them, which when trying to maintain an image of middle-class respectability, may see the number of creditworthy people diminish.

Though most of us do want more competition and for places like credit unions to have more relevance in the market. Some very complex conversations and arguments are going to be had over this subject, that much is for sure, but it is interesting to note that advocates for an end to free banking are not only the usual suspects alone.

A high street bank. Photograph: Getty Images

Carl Packman is a writer, researcher and blogger. He is the author of the forthcoming book Loan Sharks to be released by Searching Finance. He has previously published in the Guardian, Tribune Magazine, The Philosopher's Magazine and the International Journal for Žižek Studies.
 

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I was wrong about Help to Buy - but I'm still glad it's gone

As a mortgage journalist in 2013, I was deeply sceptical of the guarantee scheme. 

If you just read the headlines about Help to Buy, you could be under the impression that Theresa May has just axed an important scheme for first-time buyers. If you're on the left, you might conclude that she is on a mission to make life worse for ordinary working people. If you just enjoy blue-on-blue action, it's a swipe at the Chancellor she sacked, George Osborne.

Except it's none of those things. Help to Buy mortgage guarantee scheme is a policy that actually worked pretty well - despite the concerns of financial journalists including me - and has served its purpose.

When Osborne first announced Help to Buy in 2013, it was controversial. Mortgage journalists, such as I was at the time, were still mopping up news from the financial crisis. We were still writing up reports about the toxic loan books that had brought the banks crashing down. The idea of the Government promising to bail out mortgage borrowers seemed the height of recklessness.

But the Government always intended Help to Buy mortgage guarantee to act as a stimulus, not a long-term solution. From the beginning, it had an end date - 31 December 2016. The idea was to encourage big banks to start lending again.

So far, the record of Help to Buy has been pretty good. A first-time buyer in 2013 with a 5 per cent deposit had 56 mortgage products to choose from - not much when you consider some of those products would have been ridiculously expensive or would come with many strings attached. By 2016, according to Moneyfacts, first-time buyers had 271 products to choose from, nearly a five-fold increase

Over the same period, financial regulators have introduced much tougher mortgage affordability rules. First-time buyers can be expected to be interrogated about their income, their little luxuries and how they would cope if interest rates rose (contrary to our expectations in 2013, the Bank of England base rate has actually fallen). 

A criticism that still rings true, however, is that the mortgage guarantee scheme only helps boost demand for properties, while doing nothing about the lack of housing supply. Unlike its sister scheme, the Help to Buy equity loan scheme, there is no incentive for property companies to build more homes. According to FullFact, there were just 112,000 homes being built in England and Wales in 2010. By 2015, that had increased, but only to a mere 149,000.

This lack of supply helps to prop up house prices - one of the factors making it so difficult to get on the housing ladder in the first place. In July, the average house price in England was £233,000. This means a first-time buyer with a 5 per cent deposit of £11,650 would still need to be earning nearly £50,000 to meet most mortgage affordability criteria. In other words, the Help to Buy mortgage guarantee is targeted squarely at the middle class.

The Government plans to maintain the Help to Buy equity loan scheme, which is restricted to new builds, and the Help to Buy ISA, which rewards savers at a time of low interest rates. As for Help to Buy mortgage guarantee, the scheme may be dead, but so long as high street banks are offering 95 per cent mortgages, its effects are still with us.