The End of Free Banking?
When we look back at 2007, how will we remember it? From the financial point of view, everyone will have different memories, depending on their personal circumstances. But for many, it may well be recalled as the year free banking ended.
Not officially or immediately, of course. But it was certainly the year when one of the great consumer rebellions of modern times against excessive overdraft charges laid the seeds for the UK’s big banks to think about levying fees for running our accounts for the first time in decades.
Observers have even given it a name: “the waterbed effect”. This describes a phenomenon where if you squeeze a bank’s charges, and therefore its profits in one area, it moves to recover them in another.
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Why now?
So how has this all come about? Actually, it all started back in 2006, when many bank customers’ long-running anger at the way they were being hit by high charges - sometimes running into hundreds of pounds - on unauthorised overdrafts suddenly boiled over.
What turned this anger into a powerful consumer campaign were a number of factors that coalesced together.
First was the growing perception that such charges were illegal. Campaigners argue that under the Unfair Terms in Consumer Contracts Regulations 1999, bank charges must reflect actual costs incurred. Also, the level of overdraft charges failed to comply with the “reasonableness” rules required for service fees under the Supply and Services Act 1982.
Indeed, a similar test appeared to have been applied by the Office of Fair Trading (OFT), the credit watchdog, in respect of credit card charges. And in that case, credit card providers had amended their fees. Many thought: if it works with credit cards, why not bank accounts?
How customers fought back
The internet fuels the campaign
The second factor was the use of the internet to argue this point and specifically, the easy availability of so-called “template letters” from a number of websites that customers could download, personalize and send off to their banks, demanding a refund of all charges.
The third key driver in the campaign was the fact that banks started to cave in and refund the charges they had levied to tens of thousands of customers. In many cases, repayments stretched back up to six years and totalled many thousands of pounds, providing added impetus to those who could see that it was worthwhile doing the same themselves.
A mounting media clamour, in which readers’ successes were eagerly chronicled, helped stir the pot.
The endgame
It all had to end of course: the banks realized by the middle of 2007 that they could no longer continue to haemorrhage money to their customers in this way.
By this point, it was estimated that hundreds of millions of pounds had been repaid or was being offered in compensation to customers who had done little more than send a stroppy letter to their bank demanding their money back.
So the banks and the OFT struck a deal. In return for a stay on any more payouts, the banks agreed to a test case where the legality of overdraft charges would be heard by the courts some time in 2008.
If the banks lose, payouts will start up again. If they win, they will go back to charging people with overdrafts as much as they can get away with.
The fallout
Amid all the furore, few people understood one key consequence of the charges campaign: if you stop the banks making money out of the minority of people who go over their overdraft limits, they will look to earn it elsewhere. And the natural place to start is with bank account charges for all.
One intriguing feature of the UK banking landscape for several decades has been the availability of “free” current accounts for those in credit. As long as they remain in credit, they pay no fees, unlike many of their counterparts elsewhere in Europe and worldwide. Of course, we paid in other ways: with endless admin fees elsewhere.
But already in late 2006, banks were warning that if they are forced to curtail their overdraft charges, a significant source of profits, everyone would pay the price.
The first bank to make a move was First Direct, which in November 2006 announced it would charge current account customers £10 a month if they didn’t have another First Direct product or pay in at least £1,500 a month (or keep that as an average balance). In September 2007 it went further, and stopped paying interest to its 1.2 million current account customers. Nationwide also hinted that it might introduce charges.
It is now clear that if the legal test case goes against the banks - they will appeal of course, so the process could last many more months - they will bring to an end the current free banking arrangement.
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What comes next?
The exact form the new regime might take is not yet known. It could be a monthly fee, or a charge for visiting a branch, as happened to unfortunate Dorset residents last year.
Or we may have to pay per transaction, for example on standing orders, direct debits and cheque payments, as happens in other parts of the world.
Either way, the old system of running our current accounts looks to be on the way out. That banks could use a consumer revolt in order to hike the amount they skim off everyone’s accounts - how unlike them to behave that way.
[tags] bank charges,credit card charges, claim back [/tags]