Could negative rates signal the end of free banking?

Everybody knows there’s no such thing as a free lunch. But is there any such thing as a free bank account?

Current account customers in the UK could be about to find out. This week, HSBC admitted it would have to look at charging for basic banking services in some markets, because it was losing money on large numbers of accounts.

Such a move would be likely to produce wails of outrage from customers of British banks. Unlike those in the US and Europe, they have not suffered the indignity of being charged for banking services since the 1980s, unless they dip into the red.

Instead, the UK has carved out its own peculiar niche — the “free in-credit banking model”. So long as your account is in the black, you won’t be charged a penny for online banking, making payments and transfers, using the UK’s network of free cash machines or having a cheque book (retro).

Yet even before HSBC’s admission, there were plenty of people, from the governor of the Bank of England down, who claim the UK’s “free” banking model is as anachronistic as paying by cheque in a shop.

Banking, like any other service, costs money to provide. Say that banking is free and you are merely shuffling these costs around.

The best example of this is the eye-watering fees banks were charging for unauthorised overdrafts. Regulators intervened, taking a dim view of levying charges on the least well-off customers to cross-subsidise services for the wealthier ones. Now you will struggle to find an overdraft with an APR of less than 40 per cent.

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For more than a decade, Bank governor Andrew Bailey has been warning that the free banking model is a “dangerous myth”. He has said that disguising the true costs of providing services could have encouraged mis-selling such as PPI as banks tried to make up the profits elsewhere.

Logically, a simpler model with transparent charges would be fairer, but it’s one that carries a considerable risk of customer desertion — evidenced by Wednesday’s front pages, and some furious back-pedalling from the HSBC press office.

I’m sure all the banks would love to start charging — although no bank wants to be the first to do so. But if negative interest rates were to come to the UK, could this force a wholesale rethink?

I’ve been thinking about this in the context of cash savings. The combination of “forced savings” and financial caution mean people are saving much more than usual in the UK, even though big providers like National Savings & Investments have slashed interest rates on deposits.

While holding cash is comforting, I do know that the rate of interest on my savings is effectively zero once inflation is taken into account (for millions of people getting zero interest, it is already costing you).

But how would I feel if my bank started charging me to hold that cash?

Let’s just say I would be extremely peeved. I have previously walked half a mile to use an ATM that wouldn’t charge me £1.75 to withdraw my own money. It’s the principle!

Early evidence from Europe, where they already have negative rates, shows that so far it’s only the wealthiest who are paying banks “reverse interest” on cash balances of hundreds of thousands of euros or Swiss francs.

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I cannot see banks in the UK passing on charges to everyday savers. For one, it would cause uproar and could create liquidity issues if people swapped banking over-the-counter for under-the-mattress. And with studies showing millions of Britons have no savings at all, charging for deposits would do nothing for financial resilience.

But this means negative rates are another cost the banks will have to swallow — and we don’t yet know how low they could go. So what’s the solution?

Brits might balk at the thought of paying a monthly fee, but millions of people with packaged bank accounts already shell out around £15 a month for perks such as cashback on bills, cheap breakdown cover and travel or gadget insurance.

Essentially, the same cross-subsidisation forces are at work, as many people pay for these services but don’t use them (or claim they’ve been mis-sold when they find the various policy exclusions render them worthless). And banks seem more likely to trim the perks than persuade more of us to pay for them — note further cuts to Santander’s 123 account this week.

What about charging the wealthiest customers more? The problem there is they often get similar perks for nothing via premier banking, as the banks hope to cross-sell premium services such as investment advice and wealth management.

Sarah Coles, personal finance analyst at Hargreaves Lansdown, thinks the banks will become more creative in passing on charges to the masses.

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“In the future, I could see banks charging for posting paper statements, providing a cheque book, replacement cards, and even levying charges on transfers,” she says.

The future of bank branches is a crucial part of this debate. Used by dwindling numbers of people, they are a growing cost burden. Those who prefer online banking might resent cross-subsidising this part of the service — but banks can hardly charge an entry fee to customers who bank in-branch. 

“Fewer people bank in-branch, but the problem is those that do just can’t do without them,” Ms Coles says.

I feel certain that more banks will close branches as they attempt to cut costs, but if ATMs vanish with them, more people will have to pay to take money out — and studies show it’s the elderly and poorest in society who are most likely to be cash dependent.

For all of these reasons, I feel the likelihood of legislation is rising, taking the problem out of the banks’ hands and passing it to regulators and politicians.

The Treasury launched a call for evidence on access to cash this month, asking how the UK could legislate for an “appropriate” cash network, and which regulatory body should be charged with maintaining it. If you’re cash rich but time poor, leave a comment below and I’ll submit a bumper response from FT readers — and I won’t charge you a penny for your thoughts.

Claer Barrett is the FT’s consumer editor, and a financial commentator on Eddie Mair’s LBC drive-time show, on weekdays between 4-7pm:; Twitter @Claerb; Instagram @Claerb



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