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Alex Letts

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Alex Letts - U

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When 'Free banking' means 'charges of eight hundred pounds'

09 December 2014  |  4083 views  |  1

The most predictable question I get in investment meetings is “why would anyone pay for a Ffrees current account, when UK current account banking is already free?”

It’s not smart to sigh at this point.  Nor to bristle.  But I challenge anyone to try explaining the sheer scale of the lie that UK consumers are sold daily around the cost of their banking service, and to do it without any glimmer of emotion.

It reminds me of the first rule of advertising. Truth is best, but lies work fine too.  Remember the 80’s slogan “This is the age of the train”. It wasn’t.  And what about “Nutella is good for you”. Hmm. Or “For your Health: Asthma Cigarettes (not recommended for children under 6)”. Ah that’s ok then.

Well the great Free banking lie is about to unravel and leave the banks in a bit of a pickle.  The UK Competition & Market’s Authority is conducting a multi million pound 18 month review into aspects of banking, not least the mirage around free-if-in-credit accounts. They should save their time and money and just read the numbers below. Free is not free if it costs up to £800 a year. 

The so-called Free accounts are only free whilst you are in credit.  So that’s fine for the pretty well-off sub section of society.  But for the majority it’s not OK.  Indeed it gets larcenous.

Fees vary by bank (but – no, surely some mistake - usually add up to about the same overall cost)

-A planned overdraft has a monthly fee:  up to £20pcm

-A planned overdraft also has a chunky interest rate of 19.95%

- If you go over your agreed overdraft limit there’s a charge of up to £10 per day

- If you also bounce a payment (cheque or direct debit) there is a charge of up to £20 per transaction

So, for an average person with no savings (60% of UK), earning average wage of £27,000 pa the likelihood is that they will have an agreed overdraft of £1000 and exceed it once month basis and bounce on payment a month.  Total annual cost of up to £800.   (Don’t believe me, well check them out (Santander: http://bit.ly/1z39dID HSBC: http://bit.ly/1zoOuAd or Lloyds: http://bit.ly/1GfmIGC )

Er, what? Wonga-esque.

A Ffrees account costs up to £120 a year. (That’s the monthly fee cap on a Santander overdraft!)

Now perhaps you can see why the UK current account market is facing disruption, and why VC’s who ask that Killer Question are in fact inviting the biggest and most crushing slam dunk in the history of UK investment meetings.

 

TagsRetail bankingInnovation

Comments: (3)

A Finextra member
A Finextra member 10 December, 2014, 12:04

From ffrees.co.uk: no Overdraft, so no debt.

To paraphrase, we won't charge you for a service we don't actually offer. How much would you charge if you did?

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Alex Letts
Alex Letts - U - Sheffield 10 December, 2014, 12:50

Yes fair comment, and something I should have put in the blog. :)

Another way to look at this is that Ffrees charges up to £120 pa for a current account service that banks charge nothing for!

This is because the banks cross subsidise their core service using  a business model built around an expectation that customers will either make a mistake or get into debt. That practice may become illegal but the CMA has yet to pronounce.  It is accepted practice, but not necessary on other models.

So we don't need to offer these debt "services", and our customers, by and large prefer us not to, sensing a self-imposed discipline (30% say they get a Ffrees account because it has no overdraft, and 40% say they left their bank because of "high charges".)

One further comment:  Ffrees is not anti-debt (nor anti bank).  Some customers may have the best intentions to avoid debt but due to circumstances need a loan.  The de-componentised model we work to, means they will shop around rather than fall into the easiest option of borrowing from their current account provider which may not be the best deal they could get.

 

Alex

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Alex Letts
Alex Letts - U - Sheffield 15 December, 2014, 12:02

....and today's BBA/Treasury announcement means that these charges need to fall by end of 2015, but only only on basic accounts.  This is tough on the banks actually as these accounts are their least profitable/most loss making already.  Wondering if this part of a political deal to clear the decks for the banks to get rid of free-if-in-credit banking before CMA tells them too.

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