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The Hidden Costs of Banking

The incoming head of the financial regulator has taken customers and their banks to task for perpetuating the myth of free banking as discussed in this BBC Business Article.  Andrew Bailey says banks need to tear away the curtain and reveal the hidden costs of everyday banking. 

Transparency is laudable but it will be extremely hard for banks to make such disclosures.  And what of the cost of actually calculating those costs and what should banks and customers do with them?

Bailey acknowledges the difficulties of a bank openly charging for current accounts. Which banker or shareholder (in many cases the taxpayer) would think it was a good idea to be the first to adopt a marketing model that’ll encourage customers to switch accounts. The only way it could happen is if the regulator mandated an end of “free bank banking”. Is that really a vote winner? 

However, coming into office with a debate about hidden costs is relevant for the industry because the cost to do the business of banking is large and – in some respects – is getting larger. A key cost is the complexity of systems and processes that ironically has come about from the need to respond to dynamic market conditions, new channels of communication and compliance with ever heavier rafts of regulation and external scrutiny.  

Given Bailey’s call for change it is hard to imagine them actually happening, the real job for the banks lies in bringing these operational costs under control. While not very headline catching, the strategies to simplify and reinvigorate back office and customer facing systems are as transformative, if not more transformative, and exciting in their scope and implications as the marketing and compliance initiatives.



Comments: (3)

A Finextra member
A Finextra member 24 May, 2012, 22:40Be the first to give this comment the thumbs up 0 likes

Banks could easily charge for services if they actually delivered services that warranted it.  The issue is that Bank A offers the same boring services as Bank B.  If Bank A charged for it, everyone would jump to Bank B.  Banks need to take a long hard look in the mirror, realise that banking is not just about deposits and lending and start to focus on a quality customer experience.  People are willing to pay if they get something of value in return.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 25 May, 2012, 17:31Be the first to give this comment the thumbs up 0 likes

Just because petrol from BP, Shell, Aral and other petroleum companies is more or less the same as one another, I won't expect them to be given away for free. Likewise, basic banking service - boring or not - doesn't have to be free. Differentiated features command premium but are not required to justify a basic fee. That banks have kept them free reflects a legacy problem: Having started off by giving away toasters and other gifts for opening checking accounts, it's too much of a stretch for them to think of levying fees for such basic banking products. That explains why most of them give away traditional, but costlier, 'products' like branch, cheques and cash for free but are able to charge fees for newer, but cheaper, 'products' like EFT, debit and credit cards. On the other hand, banks have a solution about which they smartly maintain a low profile: It's called Net Interest Margin.

A Finextra member
A Finextra member 27 May, 2012, 10:35Be the first to give this comment the thumbs up 0 likes

We 'feed' the banks our money so they can exist and be useful to us (like a cow we can milk).   Should we pay the bank also? No.  The Bank needs our money to function and prosper.  They should look good and produce good stuff for us to feed them rather than the one in the next field.

Now if you work in a bank, you might think of yourselves as 'Lions' not cows. Maybe that's a problem.

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