Don't be fooled - banking has never been free

Jim Devlin, Professor of Financial Decision Making at Nottingham University Business School, argues that soon-to-be chief regulator of the financial services sector, Andrew Bailey, is right in his mission to end free banking services.

This article originally appeared in the Nottingham Evening Post on May 25, 2012.

The "dangerous myth" of free banking

Andrew Bailey, the soon-to-be chief regulator of the financial services sector seems determined to make himself unpopular with the public.

He has made it his mission to put an end to the situation where many of us pay nothing for our banking services provided we stay in credit and don't breach our terms and conditions.

​He has reportedly described himself as "like a dog with a bone" over the issue and aims to expose the "dangerous myth" of free banking.

Banking hasn't always been free. Midland Bank created a buzz when it introduced free in-credit banking in 1984.

That decision – part of a bold strategy to acquire large numbers of new customers in what was an almost moribund market place – opened something of a Pandora's Box.

We now expect a service from our banks in return for allowing them the use of our money and we don't expect to pay.

Any suggestion that we should pay meets with a tidal wave of objections. And therein lies the problem.

For in my opinion Mr Bailey is right. People pay for their banking now by not receiving much, if any, interest on their deposits.

Why not make the charging transparent and pay directly for the services being used, as we do in most other cases?

And of course we would receive increased interest payments on our credit balances.

Nice and straightforward – pay for the services you receive and get paid for the use of your money.

Another good point that Mr Bailey makes is that lack of transparency may be a root cause of some of the miss-selling scandals that have bedevilled the industry in recent years.

In order to make current accounts pay, customers have become the target for the cross-selling of more profitable products such as savings, loans, investments, pensions and of course PPI.

Mr Bailey's plan won't solve all of the problems associated with financial services, but it is a good start.

However, changing the charging model for current account banking will be both difficult and unpopular. Let's hope our new regulator doesn't choke on this particular bone.

Jim Devlin is Deputy Dean, Nottingham University Business School and Director of the Financial Services Research Forum.