David Prosser: Free banking may be bad news for customers

Outlook It appears to be "bash a banker" week at the Bank of England. On Tuesday, the Bank's Robert Jenkins accused the industry of "intellectually dishonesty". Yesterday his colleague Andrew Bailey took up the cudgels, describing the way in which the misconception that banking is free has "distorted the landscape" (as the banks subsidise the provision of free current accounts with higher charges elsewhere, and make product decisions accordingly).

Now, one might think that banks would rather like to begin charging for current accounts, or at least for many more of the services they provide via the products (fees for cash withdrawals or direct debits, for example). But they actually prefer the status quo – and not just because they have found ways to cover the cost of what they are unable to charge for.

In fact, what our dominant providers really like about free banking is that it is a serious bar to new competition. Established players have a book of customers mature enough to subsidise their operations – enough people paying unauthorised overdraft fees, say. New entrants must be prepared to face substantial losses for an extendedperiod, particularly if they achieve scale, before they are able to develop that model. Is this why, for example, Tesco Bank still has not launched its long-awaited current account?

Several witnesses made this point to the inquiry into banking conducted by Sir John Vickers, though his final report did not address the problem. Free banking is sacrosanct, it seems, even it isn't really free and even if it stifles the sort of competition that everyone seems to agree is needed.

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