It wasn’t so long ago that using a bank account involved maintaining a minimum balance and included a whole suite of debit charges that might be levied.

The extract below shows the fees that our parents and grandparents might have incurred when using their bank account in May 1981: 

This extract from a Chartered Institute of Banking text book helpfully suggests:

…the banks are right to base their charges on the use made of the account … and they are right to expect professional men earning good salaries, private individuals in comfortable circumstances … to pay a fair price for the services they receive. In other walks of business life this happens without comment

Whilst aspects of the text have definitely not stood the test of time the assumption made was that paying a fair price for banking services should be an accepted principle as with other aspects of life.

Fast forward to 2020 and we find ourselves paying for Amazon Prime, Netflix, gym subscriptions and Dropbox and yet we still expect to receive our banking free of charge.

Is this fair or should we be paying a fair price for banking services we receive?

Then the Listening Bank changed everything

In 1984 one UK bank was concerned about losing customers and made a decision that fundamentally changed how Britain’s banking landscape operated. 

Midland Bank, then one of the UK’s big four banking groups (now HSBC), got rid of fees for cheques, statements and standing orders. In other words, it made banking free of charge – although it might be better to describe the move as ‘free in credit banking’.

“You don’t have to pay a penny,” chirped the animated griffin – Midland’s mascot – in the television commercial.

“So if you’re not getting all these [services] free from your bank, you know what to do. Go to the Midland.”

As a result, within months, every other major UK retail bank had introduced free accounts.

Since 1984 the majority of us have benefited from ‘free in credit banking’, accepted the charges levied for one off services or decided to subscribe to a fee paying ‘packaged account’ that offers services like travel insurance and car breakdown cover. 

It is also important to note that ‘free in credit banking’ can be considered to be offset or subsidised by the overdraft fees of our or someone else’s making – a subject for another newsletter.

Over the last few days two of the UK’s leading challenger banks have introduced new fees.

Monzo Bank

New fees:

Monzo have just announced that they are introducing new fees from the 31 October 2020:

  • It’ll continue to be free to withdraw up to £250 of cash in the UK and European Economic Area (EEA) from your Monzo account every 30 days – after that there’ll be a fee of 3%.
  • If your card expires, is stolen or if you’re the victim of fraud, Monzo will still send you a new card for free if you’re in the UK. But if you’d like to replace your card for any other reason they will ask you to pay £5.

There are four ways to avoid Monzo’s new fees:

  • Go cashless: Monzo customers who do not rely on cash withdrawals have been told: “If you keep using Monzo as you do now, you won’t be affected. Over the last year, you haven’t replaced a card or withdrawn more than £250 in a 30 day period in the UK or EEA, so you wouldn’t have paid any fees”.
  • Add your card to your phones wallet: Monzo will charge you £5 for a replacement card in the UK unless it expires, is stolen, or if you’re the victim of fraud. Add your card to your phones wallet to use Apple Pay and leave your physical card at home.
  • Use your Monzo account like a bank account and not a spending account: If you meet one of the following four criteria you’ll continue to get unlimited fee free cash withdrawals in the UK and the EEA and two free card replacements a year in the UK:Pay at least £500 into a Monzo account every 35 days, with at least one active Direct Debit on the same account in the same period, orGet a Department for Work and Pensions or Department for Communities’ payment (things like Universal Credit or a state pension) paid into a Monzo account every 35 days, orGet your student loan paid into a Monzo account every 8 months, orShare a Monzo Joint Account with someone who does one of the above.
  • Go Premium: Monzo Plus customers will also get the bigger allowances but this will cost you £5 month.

Monzo’s Objective:

It appears that the key driver for Monzo’s new fees is primarily to encourage account holders to use their Monzo account as a primary bank account and not a spending (secondary) account or, as a fall back, reduce the number of cash withdrawals made via the LINK ATM network (thus saving on the LINK interchange fee costs).

Starling Bank

New fees:

Starling have just announced that they are introducing new fees from the 4 November 2020 – for personal customers:

  • Payments made via CHAPS will be subject to a £20 charge. Most banks already charge for CHAPS payments and given that Faster Payments will continue to be offered free of charge it is unlikely that this new charge will impact many customers.
  • Replacement Debit Cards will be charged at £5 per card: That said, one replacement card per year will not be shared and replacement fo expired cards will not be charged. Adding your card to your phones wallet will help protect you from this fee.
  • Balances of over Euro 50,000 will be subject to a negative interest rate of -0.5%: It is important to note that (a) this negative rate only applies to Euro’s and (b) reflects charges levied on Staring for large Euro balances. Interest will continue to be paid on balances held on Sterling accounts.

Starling have also announced that new products will be launched soon, some of which will include a fee:

  • Starling Kite: A children’s Space and debit card charged at £2 a month. It is not unusual for children’s accounts with an associated debit card to incur a fee (e.g. Go Henry) and the benefit of the Kite account being within the Space means that topping up the account and viewing balances / transactions should be visible within the parent or guardian’s Starling app. This seems like a great innovation to support independence and develop financial literacy across amongst our younger generation.
  • Connected Card: Whilst the innovative Connected Card (launched during the pandemic) will remain free of charge a new version with extended features will be offered at £2.
  • Additional accounts: Additional personal and joint account will be shared at £2 per account per month.

Starling have also announced that they are introducing new fees from the 4 November 2020 for their business customers:

  • Payments made via CHAPS will be subject to a £20 charge. Most banks already charge for CHAPS payments and given that Faster Payments will continue to be offered free of charge it is unlikely that this new charge will impact many customers.
  • Payment Limits: Daily bank transfer limits can only be increased once a month with more frequent increases (above £25k) requiring a payment subscription (see below).
  • Replacement Debit Cards will be charged at £5 per card: That said, one replacement card per year will not be shared and replacement fo expired cards will not be charged. Adding your card to your phones wallet will help protect you from this fee.

Starling have also announced that a new ‘payment subscription’ be be launched with a fee of £10 per month – this feature will allow multiple payments to be made via a bulk file and allow for higher daily payment limits to be requested.

Starling’s Objective

Starling appear to have taken a different approach to the introduction of new fees – a CHAPS fee brings Starling into line with many other banks (and most of us will never need to use a CHAPS payment), not many of Starlings customers will be impacted by the Euro interest fee, with the fee only reflecting the costs that Starling have, to date absorbed and Debit Cards can be added to a virtual wallet on your phone.

The other new fees relate to value added services that customers will only incur if they perceive the value offered.

Conclusion

History shows that bank charges began to increase from 1945 until 1984, although charges did become more transparent as they moved from an arbitrary decision by the branch bank manager to being based upon actual use.

In 1984, Midland Bank fundamentally changed how Britain’s banking landscape operated and led us to an expectation that banking ought to be free of charge.

Over the years the traditional banks have offset the costs of operating our bank accounts through overdraft fees and cross subsidisation. 

With lower overdraft rate boundaries being set, less opportunities for cross subsidisation and the emergence of largely mono line ‘challenger banks’ it is clear that the UK’s ‘free in credit’ banking model is probably not sustainable in the way we experience it today.

An easy option would be for banks to charge a monthly amount (say £5) for the provision and operation of a bank account – this is, after all, something we find perfectly acceptable with Amazon Prime, Netflix, gym subscriptions and Dropbox.

Th problem here is that the days of a single bank account (often for life) are over and in our multi banked landscape such a blanket charge will only serve to restrict competition in the market place and limit choice.

Challenger banks like Starling and Monzo have transformed banking in the UK, this has only been possible because of significant investment – investment that needs to generate a return. 

I am a firm believer that access to a bank account is a right not a privilege but we have to accept that banks need to generate sufficient revenues to offer an appropriate reward to the investors.

Monzo and Starling are demonstrating different approaches to achieving profitability, if we want an innovative, dynamic and competitive bank account market in the UK we have to accept that ‘free in credit’ banking has its limitations and that charges are inevitable.

If we dislike the approach being taken by our own bank then we can use the Current Account Switching Services to seamlessly move to another banking provider.

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