The “dangerous myth” of free banking

The incoming chief regulator of the financial services industry has warned about the “dangerous myth” of free banking.

Andrew Bailey, who will lead the new Prudential Regulation Authority, has spoken about the hidden costs associated with banking services which lead many consumers to believe their current accounts are “free”.

These hidden costs include the low or non-existent interest rates customers receive on their deposits and the profits from products that are cross-sold by banks.

This appears to be a big issue for Bailey, as he believes it needs to be addressed before banks and consumers can understand what they are paying for.

Free banking could have contributed to the mis-selling of financial products, including payment protection insurance where the largest UK banks are currently repaying customers £9bn in compensation.

Whilst there is no such thing as ‘free’ banking, banks have been able to give it the appearance of being free for customers who are in credit.

The cost of this service has been effectively cross-subsidised by the charges levied on customers in debt, the sale of financial products to banking customers and the risky investment activities carried out by other areas of the bank.

Whilst we would not expect to see any single bank depart from this ‘free’ banking model, as customers would simply move to a competitor, these comments from Andrew Bailey suggest that regulatory intervention could result in more explicit charging for all banking customers in the future.

In the meantime, we all need to view the activities of banks with more cynicism; they use the myth of ‘free banking’ to gather customer information for the purpose of selling expensive products to them.

Photo credit: Flickr/drinksmachine