Call for higher account fees to provoke banking innovation
Some UK politicians have been calling for banks to revise their charging models to ensure better value for money and innovation for their customers.
The logic runs: if banks do not face a serious challenge in keeping their customers, and are unlikely to win market share from their competitors, where is their incentive to innovate?
Treasury Select Committee chairman Andrew Tyrie, as well as Andrew Bailey, executive director at the Bank of England, and Lord Turner of the now defunct Financial Services Authority have called for transparency in this area, and specifically for banks to charge a fee for current accounts.
Some believe this is the only effective way to tackle the minefield of fines and charges used to cover banks’ costs.
UK courts examined the transparency and fairness of bank charges in 2009 in a case between the British Bankers’ Association and the Office of Fair Trading, with the ruling in favour of the banks.
Since then there has been some change, specifically on the charges for overdrafts. Lloyds and Royal Bank of Scotland have introduced a monthly charge for the use of overdraft facilities, while Halifax and Santander have opted for a daily charge.
Both solutions offer greater transparency and a better deal for those who don’t use the service, at the expense of those that do. However, one spokesperson for a British bank described a daily flat charge for the use of a small overdraft as “approaching Wonga territory”.
UK banks have long been criticized for the lack of clarity of their charges, although they have been publicly disclosed for years. Bank customers pay for their accounts in a variety of ways, from overdrafts to failed direct debits or bounced cheques.
Yet evidence for the link between bank charges and innovation is mixed.
In France, for example, customers pay a monthly fee to their bank for their current accounts, as well as for credit cards and for the use of cash machines after a certain number of uses.
The UK, where banks do not charge a monthly fee, has a more innovative retail bank market, says Gareth Lodge, senior banking analyst at Celent. However, French banks make a lower profit per average customer, which suggests UK customers get a better deal.
Steve Davies, partner at PwC, adds: “It is true there are other countries where customers pay a fee for having a bank account where there is little innovation, but when you do see a country with an especially innovative bank market, it will invariably have a more aligned fee structure than we have in the UK.”
He cites Turkey as an especially innovative bank market where customers pay for their current accounts.
And yet while progress has been made in the UK, Davies says the media attention on other bank scandals, such as Libor and PPI, has effectively kicked the issue into the long grass. There is no political will to tackle the issue, especially in times of austerity, he says.
Customers are well aware they pay for their accounts via fees and charges, but there is no demand for a flat fee for bank services, according to a spokesperson at one UK bank.
There are many other factors that determine bank innovation and customer experience, so it is hard to isolate and measure the impact of bank fee structures.
However, there is a compelling logic to the argument that services should all be costed and transparent, so people only pay for what they use, and do not subsidize others to use expensive services they do not use.
“The average bank customer is better off in the UK than in Europe, but in the UK the business model is based on penalty fees, which in effect ends up penalizing those with the most financial difficulties,” says Celent’s Lodge.
“It is a very complex issue – the fact that in the UK there is a much smaller unbanked population than many other European countries might suggest the more vulnerable customers are better off in the UK with higher charges, or elsewhere where they may not have a bank account at all.”
Banks must be mindful of the possibility that changes to their fee structures will have unintended consequences on the way their customers use their services.
A small fee for the use of a cash machine, for example, might be a more transparent and equitable way to charge customers, but evidence suggests it would lead to customers making fewer withdrawals, but of larger sums of money, says Lodge. That in turn has implications for the economics for ATMs.
The introduction of Sepa is set to shake things up, giving European customers access to bank providers from across the continent. It will also make it harder to regulate banks on national lines: if UK banks were told to charge their customers in a specific way, customers would be free to switch to a foreign provider using a different model.
Greater transparency will arguably be of limited use without better education about bank services, enabling them to make sensible choices, says Lodge.
“Look at the Icelandic savings banks,” he says. “They offered great rates but people didn’t ask how they were able to afford to offer that rate. It should have set alarm bells ringing. People need better skills and tools in order to make informed choices.
“If the system were being set up now, most banks probably wouldn’t go down the free banking route, but that is where they find themselves.”
Experience shows how hard it is to change the status quo: many banks tried to introduce fees for mobile banking facilities, but aborted these attempts in the face of customer resistance.
Technically, it is hard to charge for the use of an app unless you charge for all internet services, or you just steer people away from the app. And the reality is internet banking is cheaper for banks to offer than branches or call centres, so it makes little sense to push customers away from these channels by making them pay for it.
Banks are starting to look at new charging models. While the norm in the UK is for products to be priced individually, so that the interest a customer pays is determined by their own specific credit history, Metro Bank offers customers cards with the same rate for everyone.
While this will leave some customers worse off, the bank has innovated in new areas, such as branches that open on Sundays and a greater focus on customer services.
Unless banks go to a full pay-as-you-go system, there will always be some level of cross customer subsidy, yet banks warn their research indicates such a fee structure is the least popular option among customers.
The risk to banks is increasing competition from non-bank new entrants, says PwC’s Davies.
Such players could innovate at the margins and eat into the profitable parts of banking, resulting in less profitable business being left behind and traditional banks becoming utility companies to subsidize the less profitable ones, he says.