Free banking looks safe

by Ed Bowsher on 25 February 2011  |  2 comments
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I'm delighted Barclaycard has extended the 0% period on its balance transfer card to 18 months. This news makes me all the more certain that free banking is here to stay.

The banks are always coming up with devious tricks to pinch our money, but there’s no doubt that negative order of payment (aka negative payment hierarchy) has been one of their most lucrative rip-offs. If you don’t know how this rip-off works, it doesn’t really matter because the government has thankfully made it illegal. The ban came into force at the beginning of this year.

So why I am writing about negative order of payment if it’s dead and buried?

It’s because some people predicted that the end of the rip-off would force credit card providers to cut back on special offers such as 0% balance transfer deals. The providers would have to make up their lost revenue somehow...so 0% balance transfer periods would get shorter and fees would rise.

But that’s not what’s happened! Instead we’ve seen a new credit card war break out with several very attractive cards on offer including an 18-month 0% deal from Barclaycard. In other words, you can transfer your credit card debt to a new Barclaycard and you won’t have to pay any interest on that debt for 18 months! (Although you will have to pay a fee.) That’s an astonishingly long 0% period. Even at the height of the credit boom in 2007, I can’t remember any 0% deals for longer than 15 months.

This is obviously good news for many people who carry debt on their credit cards, but I think it has positive implications for most current account customers too – it strengthens my belief that ‘free’ banking will continue for the foreseeable future.

Ever since I became a financial journalist in 2000, I’ve regularly read articles saying that the end of free banking is around the corner. In other words, we’ll all have to pay a monthly fee to our bank just to operate our current account.

These articles always contain plausible arguments, but free banking carries on year after year all the same. That’s because we have a reasonably competitive current account market and banks know that current account customers offer a very valuable opportunity for cross-selling other financial products.

Looking ahead, the UK banking market is becoming more competitive, not less. New entrants are coming into the market such as Metro Bank and Tesco, while Santander is clearly determined to gain market share.

That extra competition means that an end to free banking looks unlikely. And the new credit card war makes it even more unlikely. When you see that level of commercial aggression, it’s clear that free banking isn’t going to end any time soon.

More: Free banking can survive | Why free banking is bad for you |  Check out Bowsher’s Blog