Andrew Bailey certainly knows how to start a new job with a splash. The executive director of the Bank of England, who will soon take control of the Orwellian-sounding Prudential Regulatory Authority, last week stirred up the financial services industry with a call to end free banking.
His argument? That it was a myth. Customers pay for their current account one way or another, and it would be better if the charges were a lot clearer. More controversially, he suggested that a run of mis-selling scandals might have been avoided if there were proper charges – because the banks had to recoup money they lost on current accounts by selling rubbish insurance contracts and over-priced investments instead. Banks that charged for what they do would be easier to regulate, safer, and offer better service, he argued.
There is a flaw here, however. The banks can’t charge for what they do for a simple, although worrying, reason. It isn’t worth much. The real problem with Britain’s banking system is not that current accounts are too cheap, but that the banks are too expensive to run and their products too poor.
It is possible to see what Bailey was getting at. The British banking industry has little to recommend it right now. Products have been mis-sold – from endowments on mortgages to payment protection insurance. Credit doesn’t get through to small companies, interest is negligible, and complaints to the regulators run at record levels. To cap it all, half the banks go bust and have to be bailed out by the taxpayer at a vast cost. As an industry, it is hard to think of anything positive to say about it.
Bailey puts forward an interesting analysis and he suggests a radical solution – which the industry could use right now. In many countries banks charge their customers a monthly or annual fee. In Britain, accounts generally cost nothing up front, but the bank slips in hidden charges. And there is constant pressure on staff to sell useless insurance schemes because that is the only way they can recoup the costs of running the account.
Perhaps, it is sometimes argued, regulators should even ban free accounts. Why? Because it is hard for any single bank to end them without suffering a catastrophic loss of customers. But if they all ended them at the same time then they could get away with it. The result? An industry where everyone pays for their account, and there is no incentive to mis-sell products.
There are two problems with that analysis. Firstly, it is a ridiculous restriction on competition to stop companies giving something away and making money elsewhere. That happens all the time. Newspapers are often free, and so are some TV programmes, but they make money on advertising. You can give away free concert tickets and still make money at the bar. Mobile networks give away phones but make money on the calls. Those are all sensible business models, which work well. In a healthy, competitive market it’s a mistake to ban any model. How and where companies make money is up to them.
The bigger problem is that the high-street banks are too expensive to run and the services they provide are worth little. Think about what your bank does for you these days. It provides some simple web-based services, collecting money and paying a few bills. There may be some automated direct debits.
None of it looks very complicated. Google offers a far more sophisticated range of internet services without charging for any of them. Businesses such as PayPal charge for complex cross-border financial transactions, but the sums are so tiny you hardly notice them. If Google can do so much for free, why not Barclays or HSBC?
Banks have an expensive cost structure with thousands of branches. The typical high street may have five or six banks. All cost money to maintain. And for what? A few cash-based small businesses that need to handover the notes and coins taken during the day. Hardly anyone else visits branches anymore. Why should everyone pay for a service that very few people use? True, it would be another blow for the high street, where the banks are often the only businesses left open apart from charity shops, but that is another story. Take away the branches, and a bank would be cheap to run.
Most other service industries have been transformed in the last decade. The costs of every kind of electronic transaction have fallen dramatically. Nearly all the middle men are being squeezed out of business. Banks are middle-men. There is no reason why they shouldn’t be squeezed too.
Bailey may be right that the banking industry’s structure encourages mis-selling. His solution, however, is the wrong way around. The regulators should be pushing the banks to becoming low-cost internet-only operations – and if they don’t want to do that, to encourage a new crop of competitors who will.