Here’s the fix. The FCA is reviewing banking charges. There will be an announcement in spring next year on remedies.
Every bank CEO knows that it will seek more downward pressure on pricing, which will further reduce profitability of (already unprofitable) current accounts.
It’s a problem that has been brewing since the late 1980s. My personal analysis is this: accounts that are – at face value – free, cost the banks hundreds of pounds to provide. As a consequence, banks have all kinds of charges and revenues associated with them that are poorly sign-posted. And because these charges only catch about half the customers, those that do pay, therefore, need to fork out hundreds of pounds to ensure the bank portfolios of free current accounts wash their face.
The first pre-emptive attempt to head off punitive decisions from the regulator has been announced by the Lloyds Banking Group (which includes Lloyds and Halifax banks). From November, there will be a simple, single rate of 1p per day for every £7 of planned overdraft usage. Nice and simple on the face of it.
With up to 30% market share, Lloyds Group expected to lead the market home on this one. Except that nothing in banking is simple, as eye-popping overdraft rates (estimated to be over 50% APR) attest. It is shaping up to be a PR disaster, further reinforcing the bank-as-bogeyman stereotype. It also plays into the hands of new kids on the block offering digital models, more flexibility and lower cost bases. It begs the question: who on earth advises these people?
The dilemma now facing other bank CEOs is this: do they lower prices and lose more money, just to keep the regulator off their backs? Service will suffer and competition will be emboldened. Or do they try to move to a new, more transparent model as Lloyds has, and risk it becoming too complex and, consequently, misunderstood?
To add insult to injury, the one thing that the CEO would love to do is simply charge each customer fairly for the services and products they receive. But imagine the backlash in telling customers that they would have to pay for what they have been told by the banks is a free service. My own view is that this mess will fester on, and the banks will gradually look to acquire service providers and models that help them out of their current account dilemma. While all accounts can and should be charged at cost-plus – to avoid being anti-competitive and cross-subsidised – I don’t think the FCA has the political backing for such a radical and right and proper enforcement. Expect more downward pressure and watch as the digital players take advantage. But in truth, don’t expect too much else.
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