Free banking claim is ridiculous, says Which? boss

Cash machine Many commentators have argued that free banking is a myth

A claim that mis-selling at UK banks might have been avoided if fees were charged for accounts has been branded as "ridiculous".

The new chairman of Barclays said that scandals, such as the mis-selling of payment protection insurance (PPI), were the consequence of free banking.

Sir David Walker said he agreed "in principle" with the idea of charging for accounts.

But consumer group Which? said that a cultural change was needed at banks.

"It is a complete myth that banking is free. Consumers pay over £9bn a year in fees and lost interest on their current accounts and the suggestion that if banks charged more they, would stop mis-selling, is completely ridiculous," said Richard Lloyd, Which? executive director.

"Consumers should not keep having to foot the bill when the banks have let us down so badly.

"There must be fundamental change to the culture and practices of the banks, including greater transparency about the true cost of banking."

How consumers pay

The PPI scandal was followed by the mis-selling of interest swaps to small businesses.

Sir David Walker Sir David Walker has replaced Marcus Agius as the chairman of Barclays

"Because banks are not charging, it drives them inexorably into this sort of position," Sir David told the Sunday Telegraph.

He is not the first to raise questions about the link between "free" banking and mis-selling scandals.

In May, the chief regulator of the financial services industry, Andrew Bailey, said that the lack of clarity over how consumers paid for banking services had "encouraged" the mis-selling of products.

"In short, I think that the reform of retail banking in this country cannot move ahead unless we tackle the issue of free in-credit banking, and have a much better sense of what we are paying for and how we are paying," he said.

Interest foregone

The majority of customers do not pay a fee to their bank for the right to open and maintain a current account, but they are charged in other ways.

Interest rates are lower than the levels offered with savings accounts or the official rate set by the Bank of England. Charges are levied for going overdrawn without permission or for making certain transactions.

Start Quote

If in return for fair fees we get banks competing for our custom by providing excellent service, it may be a price worth paying”

End Quote Mike O'Connor Consumer Focus chief executive

The issue of "free" banking was addressed in the Independent Commission on Banking - the Vickers report.

It recommended that customers' annual statements explain the amount of "interest foregone" by a customer. This will be put into place next year.

Interest foregone is calculated by subtracting the amount of interest earned from a current account from the amount of interest that could be earned had the consumer put his or her money in an account which earns higher interest, or put some of that money in savings.

Mike O'Connor, of watchdog Consumer Focus, said that the current perception of free banking was not good for competition, or for customers.

"Fee-free banking is not necessarily good value if you do not get a good service. This is what consumers get too often, as we have seen recently. If, in return for fair fees, we get banks competing for our custom by providing excellent service, it may be a price worth paying," he said.

"What must absolutely be avoided is customers facing the worst of both worlds - paying direct fees but still facing indirect costs, poor sales practices and customer service.

"Banks need to make big changes to regain customer trust. It will take a lot more than looking again at charging structures to address recent scandals in the industry."


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  • rate this

    Comment number 305.

    Great privileges comes with great responsibilities. Banks enjoy a semi-monopoly business environment as banking is one of the heavily protected industries from free competition. Thus it is the banks natural responsibility to repay society by offering free fundamental banking services. At the end, right to access basic banking services should be a basic human right in modem days.

  • rate this

    Comment number 302.

    I think Mr Walker knows full well that the money lost by not charging for current accounts is more than adequately compensated for by exhorbitant rates on personal loans. On my French current account (with charges modest fees) a personal, unsecured loan is readily available for between 5 and 5.5 percent. I know which system I prefer.

  • rate this

    Comment number 239.

    They charge for banking in Canada and the people there still hate the system even after over a decade of the system being in place. There is no improvement in service. Clients who maintain a minimum balance often do not have to pay fees. As a Canadian It is really annoying to know that you can only use an ATM a specified number of times before the bank starts charging $1.50 to withdraw money.

  • rate this

    Comment number 226.

    Since the government passed legislation in the 80's which allowed employers to force non-cash payment to staff then the government has to provide a means of free banking.
    Otherwise I'll have my pay in cash please and won't need to use a bank!

  • rate this

    Comment number 208.

    Given that almost all transactions are electronic nowadays, exactly how much do they really cost the banks?

    Virtually all my bills are paid by direct debit & probably cost less than 1p each. Compared to the unpaid interest on my account then, my bank almost certainly make a profit.

    Banks used to say no charges as long as you stay in credit by £x, which seems fair so why not go back to that?


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