Daily Times

In economics circles there’s a famous saying that “there’s no such thing as a free lunch”. But according to the UK banking lobby there is such a thing as free banking. Here’s how they describe it. Think of all those services provided to you by your bank – the debit cards, the credit cards, the cheque book, the printed statements, the always reliable website, the efficient call centres, the branches packed with helpful staff. All of that is provided to you with zero monthly or annual charge. The banks are giving it away. Unlike in many European nations, ordinary banking is “free” in this country. And this, argues the lobby, is a terrible commercial distortion. It means banks are making a loss on their day-to-day businesses and need to make the money back from other activities. It is why, some members of the lobby suggest, there have to be penal charges on those customers who dip into overdrafts. Some even suggest free banking is the underlying reason banks have mis-sold so many dodgy products to customers such as Payment Protection Insurance (PPI) over the past fifteen years. “Because banks are not charging, it drives them inexorably into this sort of position” said Sir David Walker, the chair of Barclays, a few years ago. So the solution, we’re told, is for banks to charge a monthly fee on current accounts. Then all these nasty overdraft charges could melt away. And the banks would probably behave better too. Does that sound plausible? Don’t be taken in. Free banking, as the Competition and Markets Authority pointed out today in the latest instalment of its investigation of retail lenders, is a myth. To understand why it’s necessary to grasp a couple of very basic points about how a bank works. Banks borrow money from ordinary depositors like you and me and then lend out the money at a certain interest rate. The difference between the interest rate at which they lend out the money and the interest rate at which they borrow it constitutes their revenue. Now, how much interest do you receive on the cash that’s in your own bank current account? The chances are that it will be a vanishingly small amount. It may well even be zero. It will most probably be less than the economy wide interest rate for borrowed funds set by the Bank of England which is about 0.5 per cent. Or less than you could earn in a dedicated savings account. This is the true cost of your bank account: the difference between the economy-wide interest rate and what you receive in interest from the money in your current account. This is known as “foregone interest” and this feeds directly into the top line revenues of your bank.