End free accounts, says bank boss


Published: Wednesday 4th February 2015 by The News Editor

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A boss at a major bank has told MPs that it would “make a lot of sense” for the industry to end free-if-in-credit banking.

Moray McDonald, Royal Bank of Scotland’s managing director of personal and business banking products, said that ending the notion of “free” banking would enable current account providers to innovate more.

Answering questions from MPs sitting on the Treasury Committee, Mr McDonald said: “Would we be in a better place if we didn’t have free-if-in-credit banking?

“Yes we would. That inherent cross-subsidy would disappear and there would be more incentive to innovate because you would gain from doing so and be able to differentiate more, that makes a lot of sense to me.”

Mr McDonald was responding after MP Mark Garnier posed the question of the industry: “Wouldn’t it be much better if everybody finally turned round and said: ‘Actually this is ridiculous, we’ve been duping customers for years and years and years, we’ve been having to rip them off, let’s go back to where we should be,’ which is tell people how much it costs, charge them for that, give a better service and stop trying to sell things like PPI insurance…?”

Earlier this week, a report by financial services firm PwC argued that the notion of free current accounts is “unsustainable” and may increase the risk of future mis-selling scandals.

In reality, current accounts generally are not “free” at all as they are funded through overdraft charges, penalty fees, uncompetitive or zero rates of interest and banks using their relationship with their current account customer to cross-sell them other products.

Mr McDonald, who said the RBS banking group has around 16.5 million consumer customers, said: “There is a cross-subsidy inherent in the UK banking system and it’s a distortion which is very significant and far-reaching.

He continued: “It costs you quite a lot to provide something, and it very much does, so a current account holder expects to be able to visit a branch, to call us if they have a problem, perhaps to use a mobile app, that costs a lot of money.

“When you don’t charge for that, that clearly is a distortion.”

He said that because the cost needs to be covered elsewhere: “It gives rise to a cross-subsidy”.

The report from PwC found that despite consumers being generally aware that they pay for their accounts through various other charges, two-thirds (62%) of consumers say they are not prepared to pay anything for their current account.

Concerns about the current account market were also raised last year by consumer group Which?, which highlighted a ”worrying lack of innovation in products and service” and said that consumers often find it hard to calculate charges and compare accounts.

Mr McDonald said his bank holds about 17% of the stock of current accounts across the UK and that it intends to grow this in the coming years.

He discussed various improvements the bank is making for its customers generally, such as simplifying its product range and acting more fairly, so that new customers do not get a better deal than existing ones.

Mr McDonald was appearing alongside Craig Donaldson, chief executive officer of Metro Bank, who called for more diversity in the industry.

Mr Donaldson said: “What we don’t need is more of the same.”

Asked to give examples of where he thinks there is not a level playing field between the challenger banks and the biggest players, Mr Donaldson said the amount of capital that banks are required to hold should be looked at, to enable them to compete on more equal terms.

He continued: “I have to go into the payments infrastructure through a big bank. It’s crazy if you want a level playing field that you force new entrants and banks building like mine to go through big banks into the infrastructure that’s owned by the big banks… I cannot believe any other industry would be allowed to do this.”

Mr Donaldson continued: “We really need to look at what’s been happening around savings rates. I find it shocking that we can cut rates on customers without telling them.

“I can’t believe that we want loyal customers, we want customers to trust us, yet I’ve seen day in, day out… where banks are cutting rates… it’s not communicated to them and then we expect customers to trust banks, it must stop.”

Published: Wednesday 4th February 2015 by The News Editor

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