Will free accounts be a casualty of increased competition?

Business banking news review: week ending 24 July 2014

Competition betwixt High Street lenders and new upstarts is hotting up, which is good for consumers – but experts say that free accounts may be a casualty.

Originally massive personal and business bank account providers like HSBC, Barclays, and Royal Bank of Scotland had the financial service sector locked down. You were up the creek without a paddle if you didn’t have a branch near you and your lender didn’t offer online banking services – you would have to go out of your way to do your banking business. However, the game has changed in a major way over the past few years, and new upstarts like Metro Bank, a lender that just announced record deposits of £1.2 billion, are stealing market share left and right from the old High Street regulars.

This is fantastic news for anyone tired of being stuck with banking choices that range from bad to worse. Sure, it’s easier than ever to switch current accounts thanks to new regulations requiring the transfer to be speedier than ever, but bigger banks are trying to adapt to the new competitive environment. Ironically one of the biggest selling points for many banks – fee-free accounts – might end up not seeing the light of day as a result.

For what it’s worth it sounds completely absurd doesn’t it? Banks need to become more competitive – and any High Street executive knows this – so doing away with free accounts sounds about as effective a marketing technique as shooting yourself in the foot. I mean think about it: what would you do if your bank sent you a letter in the post telling you it’s going to start charging you to hold on to your money? You’d probably switch to another bank, wouldn’t you?

The ‘expert’ wisdom is that if all the banks in the UK do this, consumers would begin to switch willy-nilly in a frenzy, looking for the best deals. This would then generate that all-important competitive edge. Meanwhile it sounds absolutely stupid to me – if even one bank decides to keep its fee-free accounts, everyone will flock there. Hardly going to help competition if banks drive away customers into the arms of their rivals!

The only way this would work is to make it mandatory. Legislate it and I suppose it might be successful. It still seems absolutely mad to me, though – doesn’t it?

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