Free banking can survive

by Ed Bowsher on 23 November 2009  |  2 comments
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If the banks are forced to pay out compensation for unfair overdraft charges, they may introduce fees to make up the lost revenue. But I reckon savvy consumers will still be able to get free banking.

On Wednesday the Supreme Court will give the latest ruling in the bank charges case. If the banks lose they could end up paying out billions in compensation. 

That's great news for the many people who will receive compensation. But the worry is that the banks will impose new charges to make up the lost revenue. The charges could include: 

• monthly fees for current accounts
• monthly fees for credit cards 
• charges for cash withdrawals from ATMs 

I can understand why people are concerned and I suspect that some banks will introduce new charges. However, I doubt very much that free banking is about to end completely. 

I say that because the UK banking market is going to get much more competitive over the next couple of years. Parts of Lloyds and Royal Bank of Scotland are due to be spun off into new banks whilst the likes of Tesco and Virgin look set to start aggressive campaigns to win market share. Then there's the new Metro Bank which is planning to launch next year and could have as many as 200 branches. 

On top of that, several foreign banks such as Bank of China have entered the UK mortgage market - they might decide to expand their businesses into savings and current accounts. 

With lots of competition, surely some of these new entrants will use the lure of free banking to attract new customers? 

And even if there's less competition than I expect, I believe the worst case scenario will be similar to what Santander announced last week for its Zero current account. The Zero account is an excellent product but it will only be available to Santander mortgage customers. I suspect we'll see other banks try and lock-in customers with market-leading products that are only available to existing customers. 

So yes, there's a strong chance that some banks will curtail free banking. But not all banks. It'll then be up to consumers to switch to the banks that offer the best deal. 

Before I finish, I should just make clear that Wednesday's verdict isn't necessarily the end of the road for the bank charges saga. The Supreme Court is ruling on whether the Office of Fair Trading (OFT) has the power to make a decision on fairness. If the court rules against the banks on Wednesday, the OFT will then have to make its decision, and the banks could then challenge that ruling in another court case.

So things could drag on for a while yet....

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