May 24, 2012, by Chris Ennew
Why Andrew Bailey is right and why it’s a dangerous commitment to have made
Andrew Bailey, the soon-to-be chief regulator of the financial services industry has reportedly described himself as “like a dog with a bone” over the distortionary consequences of “free in-credit” banking which he has as a “dangerous myth”. His speech to the press rehearsed many of the well-known arguments about implicit or covert pricing versus explicit or overt pricing. I am old enough to be familiar with overt pricing of current accounts and retain quite vivid memories of the buzz created when the then Midland Bank introduced free in-credit banking in 1984. That decision – part of a bold strategy to acquire large numbers of new customers in what was an almost moribund market place – opened something of a Pandora’s Box. We now expect a service from our banks in return for allowing them the use of our money and we do not expect to be charged explicitly. Any suggestion that we should be (even if accompanied by the payment of interest on our balances) meets with a tidal wave of objections.
At 9.40 today (Thursday 24th May), the BBC web site report on Andrew Bailey had over 150 comments – telling us something about the level of interest this story generated (in contrast there were only 100 comments on the staggering revelation that the NHS paid £17 for a pizza base). So clearly, Mr Bailey has touched a nerve. And if you plough your way through those comments you’ll detect considerable anger and opposition to the idea that “free in-credit” banking should come to an end. And therein lies the problem.
There is a very strong case to be made for a transparent charging structure for retail banking; customers would pay directly for the services being used rather than implicitly through interest rates foregone. And of course they would receive interest payments on their on credit balances. Nice and straightforward – I pay you for the services you provide and you pay me for the use of my money. This sort of transparency is generally considered to be a “good thing”, and yet the widespread perception will be that something that was free is now being charged for. Transparency as an end in itself it may not be a good enough reason for trying to drive through significant and unwelcome change.
But if we think in terms of the broader consequences of transparent charging then the argument may be much more compelling. Although not given much coverage in the press, Mr Bailey makes the point that lack of transparency may be a root cause of some of the mis-selling scandals that have bedevilled the industry in recent years. Current accounts are not terribly interesting products, there is very little substantive difference between providers and changing bank is a hassle. So we have a market characterised by a high degree of inertia. Once captured, current account customers will tend to remain with their provider and become the target for cross selling activity as banks and others seek recoup the investment in providing less profitable current accounts by providing more profitable products such as savings, loans, investments, pensions and of course PPI. So, there is a strong argument to suggest that “free-in credit” banking is underpinning a business model that creates clear incentives for mis-selling and fuels a lack of trust in the sector.
But let’s not delude ourselves that the introduction of transparency in charging will solve this problem. It won’t. There are many more systemic cultural issues within the financial services sector that will need to be addressed if the sector is to develop a more sustainable relationship with its retail customers. And in the meantime, changing the charging model for current account banking will be both difficult and unpopular. Let’s hope our new regulator doesn’t choke on this particular bone.