Future Gazing

Banking Faces Seismic Shift

OFT victory against unfair charges could lead to legendary changes in the way the banking system works. Farewell free banking…

So, after arguing and petitioning for two years, those fervent campaigners set to get justice in the OFT versus Banks ‘Unfair Charges’ test case have won their first battle.

In April, the High Court judge confirmed that bank charges are subject to fairness rules. Now, we are just waiting for the Office of Fair Trading (OFT) to assess the charges and, as is looking increasingly likely, to confirm that they are actually unfair.

Many will be rubbing their palms in glee, anticipating glorious victory in this “consumer revenge” crusade to bring down the big evil banks, but what will this result really mean for the consumer? Well, it means we should all brace ourselves for one of the biggest overhauls the banking system has ever experienced.

Insufficient funds charges are daylight robbery and someone needed to speak up against them, but this crusade is looking more and more likely to have detrimental results.

The re-imbursement of unfair charges will engender short term joy for the people who have a substantial amount to reclaim, but for the majority of the population, who have not incurred charges on their account, banking is about to become a lot more costly. In the long term, all account holders will face a mighty hit which will outweigh any benefits of an initial cheque.

Losing this court case will present banks with the perfect opportunity to impose fees on current accounts and there will sound the death toll of free banking.

Levying charges associated with insufficient funds currently generates an enormous £2.6 billion a year for the banks (which will be greatly reduced if the charges are deemed unfair) so losing this court case will inevitably haemorrhage the profits of the banks.

Plus, while it’s estimated that £1 billion in bank charges has already been reclaimed, Martin Lewis boasts that since bank charges reclaiming began over five million template letters have been downloaded from his site alone. This means there could well be billions of pounds still to be refunded.

Banks will need to make up their revenue somehow and you can be sure these billions of pounds won’t be coming from the shareholders’ profits. No, banking is a business and it will be the consumers who will pay for the results of this court case.

Some current accounts already charge fees, but these are “packaged accounts” which come with a range of benefits and services, designed to be worth more than the fees themselves. These are not the accounts we will be given. No, what we can look forward to are fees imposed simply for using your account.

Britain is currently one of the only countries in Europe that provides the luxury of free banking - for the future dynamics of our current accounts we need only to look to at the banking charges our European neighbours already face.

The landscape of current accounts looks set to change dramatically and the implications are wide reaching:

• We can wave goodbye to interest on ‘in credit’ accounts, as banks will be cutting their outgoings wherever they can.
• Annual or monthly maintenance charges are likely to be introduced.
• You are likely to have to “purchase” a credit card, debit card, cash card or cheque book (credit cards cost around €15-45 in France) and you are likely to be charged for each statement you receive. You may also be charged to access your account online.
• Plus, if the banks follow in the footsteps of many European banks we may see ourselves charged for each and every transaction we make, including cheque payments, standing orders, direct debits and even cash withdrawals!
• These transaction fees will have knock on effects on other areas of our outgoings. For example, those who are currently enjoying discounts on their utility bills for paying by direct debit may see the savings they make wiped out by bank transaction fees.
• And of course, punitive charges will still face those who go overdrawn. These charges may be reduced but they will always be applied.

So, how much will we be shelling out in bank costs?

Well, a recent survey carried out by the French consumer’s organisation CLCV found that the average annual cost of running a bank account in France is estimated at €243, that’s £193 per year!

However, that’s just what the banks charge in France for their service - for the true UK cost we must factor in the enormous capital that banks will be required to recoup on top of general costs if they are instructed to refund historical charges. Not only will they have to raise revenue to fund the refunds but the sheer logistics of dealing with such a vast number of bank charge reclaiming cases will require them to create new departments at great cost.

If, for example, £5 billion is to be refunded, with a further £1 billion required for admin costs, this would mean an extra £111 would need to be recouped from each of the 54 million active current accounts in the UK.

Even a conservative estimate, with the costs of refunding historical charges spread over several years, would suggest it’s likely that by 2012 our current accounts could cost us well over £200 a year (or £50 a quarter).

The exact figures will depend on many factors, including the way in which banks decide to recoup their capital and how they choose to inflict their inevitable new charges.

One thing remains clear - if the banks lose this court case, it‘s the account holders who will ultimately pay

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