Bells toll for free banking: NatWest-funded study says British system is flawed

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A STUDY funded by National Westminster Bank and published today concludes that there is an overwhelming case to end free banking, by imposing charges on customers in credit. The research, by the Loughborough University Banking Centre, says free banking makes no economic sense.

NatWest yesterday repeated its commitment to maintaining the current system of implicit charges 'during 1993', although, in keeping with most of its high street peers, the bank is known to be in favour of an end to what the report calls 'inefficient cross-subsidies'.

A survey of international banks in Europe and South Africa included in the study shows that there has been a trend away from the British system of hiding the costs of servicing bank accounts. Only in Britain can consumers expect to receive interest on their current accounts while not paying for transactions.

The study says the existing system is flawed because it gives no incentive to consumers to use services efficiently by, for example, using electronic payment rather than cheques.

Banks are becoming increasingly concerned about the cost of running accounts because low interest rates have reduced the marginal value of holding customers' cash. Although they would like to see a change to the system, none is prepared to be the first to take the flak of consumer groups who are opposed to a return to bank charges for accounts in credit.

David Llewellyn and Leigh Drake, the report's authors, conclude that banks should adopt a system similar to that used by the utilities. Charges would be split between a flat fee to cover fixed costs and a further charge levied on each transaction. The increase in revenue for the banks could be passed back to customers in the form of higher interest payments.

They dismiss other charging methods as unfair. So-called Disney World pricing (where customers pay a flat fee and then use as many services as they want at no extra charge) is rejected because it discriminates against infrequent users of accounts. Charging an average fee on transactions is dismissed for the same reason.

The report recommends that banks offer customers different tariffs, along the lines of the charging structures introduced recently by the cellular phone operators, Cellnet and Vodafone. Such a system would allow customers to choose rates according to the frequency with which they used their accounts.

If charging were to be introduced it would mark a return to the banking system that existed prior to the mid- 1980s when customers were charged for transactions and offered no interest on deposits. 'Free-banking', a misnomer according to the study, is a relatively recent innovation.

The authors acknowledge NatWest's funding although a note to the report stresses that 'the views and analysis expressed are those of the authors'. A spokesman for the bank said 'we hope this report makes a useful contribution to the debate.'