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So, bank charges eh..?
2012
unknownj
I guess it might as well be said that some form of charging for current accounts is inevitable. Consumers have only themselves to blame for insisting on the removal of a previously legitimate (in the eyes of the law and the business) revenue stream.. Naturally, the banks have to make that back.

Banking in the UK comes with several givens. By and large, a UK current account customer will have access to a large nationwide branch network, free access to an even larger network of ATMs, often free telephone banking and free Internet Banking. All of these things cost the bank money to run, but are provided free of charge to customers.

With fees taken out of the revenue pot, there are two routes down which banks can go, and it's likely that most banks will take the same route. It should be noted that the First Direct decision to start charging is not reflective of the mass market, and therefore can be safely ignored at this time.

As always, where multiple pricing methodologies exist, the system will tend towards a stable ground state - everybody on the best pricing for them. This is not always best for the business, and I suspect that all the banks will attempt to align their offerings fairly closely to each other, so as not to polarise their customer bases towards those customers whose fees are minimal.

Think of it almost like an electrostatic charge or something.. You have two customers - one would benefit from variable pricing and one from fixed. If two banks exist, one with variable pricing and one with fixed, then each customer goes to the bank that's best for them, and neither bank makes much money. If they both use fixed charging, then whichever bank ends up with the variable-charging customer will make more off them.

This might appear to be anti-competitive, but competition has to exist with visibility of the market in general, and to do anything different is value destroying. Eventually all customers will be on the lowest charge plan for them, and the entire exercise won't have plugged the gap in revenue. It might not start like that, but I've a feeling that that's where it will end up, somehow.


So these two methods.. The first is a fixed monthly or annual fee. The revenue that formerly came from fees is now applied to all accounts up front every month. In First Direct's model, customers with additional products on top of their current account won't have to pay the fee, presumably because those products bring in enough value to the bank that no charge is necessary. But stop to think what that means for a second - either the pricing of your loan is now subsidising your current account, or other people's current account charges are subsidising the running of your account. Neither of these is ideal.

So the fair thing to do is to apply a flat monthly charge to all accounts, which then pays for the servicing of those accounts. But who said it had to be fair? With the shift away from fees, the idea of subsidising your entire business on the back of individual revenue streams might be called into question. A fixed monthly charge still does this - it's not Pay As You Go banking, and therefore will be unfair to many people.

First Direct have come in for criticism for the fact that customers with a £1500 turnover (or with a £1500 minimum balance) will not have fees. This has opened up a rather nasty can of worms, because there are accusations that it punishes the poor. The problem a bank has is that the quality of its current account customers is directly proportional to how much money they have in their accounts, and so it is in their nature to aim to attract higher paid customers. As such, naturally they'll target them with preferential treatment, which will lead to accusations of poor conduct. Not ideal - it means that the poor subsidise the services used by the rich, in order to keep the rich happy and doing business.


The second method is variable pricing, and I'm not sure how many banks are actually considering it. It means that the cost to you of holding a current account is directly related to the services you use, giving you the power to determine how much or how little you're charged. For example, you get one new cheque book free per month - for any more, you have to pay a one-off handling charge of £2. Or you pay 25p for every cheque you write. That sort of thing.. Similarly, you might be faced with the choice of receiving your statements online (free) or having paper statements delivered (£3). All amounts I've quoted are speculative by the way, I have no idea what our plans are, let alone what we'd charge if we had any. But you get the idea..

So yes, you're left with a system in which customers are charged based on what they use. This comes back to the whole 'value destroying' thing, because if other banks are charging a flat fee, then a bank that implements transaction level pricing would attract the least active customers, and lose the more active ones. So whatever steps are taken, they have to be roughly in line with everybody else.

One advantage of transaction level pricing is that you can use it to price services in such a way as to drive specific behaviours. Want more people to bank online? Slash online servicing costs and increase branch costs. It also allows you to drive revenue to specific parts of the business, to allow them to be self-financing. For example, where we might currently close a rural branch that's not getting any business, in future we'd be able to see exactly how much money we're making from that branch. While the cost of keeping it open for a small number of customers might be prohibitive, potentially if we charged per transaction it might become more financially viable. Just an idea..


The third and previously unmentioned method is to ride out the storm. Don't charge - make a big deal of the fact that you're not charging customers to hold accounts. And just pray like hell that the increased market share you'd end up with can be leveraged into products like loans that add significant value. Because you're going to need to find that money from somewhere if not charging..

But that's already what First Direct are doing, to an extent.. Customers with other products won't have charges on their current accounts, and thus they can afford to keep the free customers by using the revenue from other products. Still, that then starts to look like financial blackmail, and won't help if those additional products aren't competitive.


Ultimately, it's hard to say what shape the banking industry will take.. I operate from the perspective of a consumer who knows a fair bit about banking, and thus haven't got any insider knowledge that might actually help me work out what's going to happen. I'd use Europe and the US as a basis for working out what might happen here, except that customers here really like their free banking, and won't respond to products in the same way as American customers. So I have no idea how the British would actually behave upon finding out they're going to be charged to have a current account.

But I know this - over the next few years, it will become more and more obvious where banks are getting their money from, either fixed charges, transaction pricing, subsidising from other products.. Whatever happens, and whether or not consumers like it, at least they'll know what's going on. It's likely to be hard to avoid.

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It's interesting reading this, cause this revolution seems to have already occured in Canada.

What happened here is that the Tier 1 banks (TD Canada Trust, CIBC, etc.) pretty much offer the same thing for chequing accounts: ~30c/transaction, or an unlimited transaction offering for about $12/mo. Due to the prevalence of the direct debit payment system, making the 40 transactions for break-even is pretty common for heavy users. Also, nearly zero interest is given. Fees are generally waived for keeping an average balance of over $1000 over the entire month.

Savings accounts tend to be per transaction, but have slightly higher interest rates (but still a pittance compared to any investment)

Transactions include direct debit payments, cheque writing, telephone, internet banking, teller (though some charge a different rate for teller transactions), etc.

Due to competition from ING, etc, many banks have set up sub-banks/assosciated-banks which basically offer free branchless banking. Basically, you do all your banking online, and through your debit card. These tend to be extremely low overhead, and so can afford to exist on the money they make from investing your money. You give up some features (talking to people, certain web banking features, the convenience of having a "major" bank account).

So, yes, they make slightly less money by having a two tier system, but they would've lost those customers to another bank anyways. So, they can have their cake and eat it too, or just have their cake.

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