Or more precisely the end of free banking for those in credit, or even more precisely the end of apparent free banking for those in credit.
For the last 24 years or so there has been this agreement driven by market forces that the banks will not make any direct charges for banking for those whose accounts are in credit. In fact some have even paid varying rates of interest back.
But now the Bank of England’s executive director and soon to be president of the brand new Prudential Regulatory Authority, Andrew Bailey, has said that the ‘myth’ of free banking must come to an end. In fact he has said that regulators may have to step in to put an end to it so that the problems it creates can be properly addressed.
He also thinks that intervention is required to prevent inertia from no one bank wanting to be the first to relinquish free banking for fear of a massive customer exodus. It would also stop people thinking that the banks were ‘colluding’ to rip them off with charges if it was made quite clear that it was the regulator’s decision.
Free banking sounds great, but as ever there is no free lunch. So the costs of running the service have to be clawed back somehow. And it is how these costs are clawed back that worries Mr Bailey.
Under the free banking model the banks have to work hard at getting money out of their customers some other way.
One of the ways was to use deposited money on the markets and to use the infamous 3-5 day ‘clearance’ time to use the money in transit on short term deposit gathering high interest. But these routes are slowly closing down as regulators put more stringent requirements in place.
But another other way was to target the customer directly with some hard selling and heavy handed tactics.
One of the traditional ways to offer free banking to the ‘good’ people who stayed in credit was to harshly penalise those that strayed from the path with heavy penalties and fees. So the wealthy and astute, much to their delight, were getting a free service off of the back of the poor and unfortunate, capitalism at work! But the OFT put an end to that with their ruling that the charges and fees were unreasonable. This is where the cracks in the free banking edifice first showed.
Another way is to get people to buy high priced insurance products, but with the advent of comparison sites on the internet this is becoming a harder sale for them.
Then there was the Payment Protection Insurance (PPI) revenue stream. Money for nothing from mis-selling something that added 20% or so to the cost of the loan, but did nothing more than act as a dead weight attached to it.
And how about those hefty credit card interest rates (with PPI attached)?
With all these billions coming in from dodgy practice it was no wonder banks were so profitable. They could line the pockets of their senior staff, shareholders and some of their better customers at the expense of everyone else. And those that paid had little or no choice at the time.
If someone uses a service it is fair that they pay a fair price for it, not expect someone less fortunate to foot their bill. And if the banks are going to be unable to make a profit off of the above activities due to the regulators, then they are going to have to charge for their services.
Even now many people pay some sort of charge for their account for ‘added extras’ that they never use. Just check yours and see what that account fee actually gets you. Maybe that’s the next mis-selling saga.