Bank charges hit poor - wherever they are

The UK's Office of Fair Trading (OFT) has concluded that the current account market in the that country is "not working well for consumers" while an analyst feels that charging fees for banking services can exclude the poor from gaining access to banking services altogether.

It says that the majority of banking customers are not aware of the charges and interest rates paid on their current account and are therefore unaware if they are receiving a good deal from their bank, leading to an uncompetitive market. As a result, just 6% of consumers changed their current account in the last year, the OFT claims. However, independent market analyst Datamonitor, a leading research company based in the United Kingdom, takes a less pessimistic view, believing that in fact the majority of customers are simply happy with their bank and see no reason to change.

Charges replace annual fees

Banks have to make revenue out of their current accounts, as they represent a central product of retail banking. Over the last two decades, retail banks have changed the way in which they make revenue from current accounts: up-front annual fees have been replaced with charges levied when consumers break the agreed rules of their bank account. Abandoning the charges would mean a return to annual fees for basic services.

The OFT's claim that the availability of information is poor is contestable. Banks do not hide information about insufficient-funds charges from their customers and rates of interest are often the central feature of advertisements for retail banks. It might actually be suggested that consumers consider their own banking habits and pick a current account with this information in mind.

It can also be argued that a current account is essentially a commoditised product. Consumers generally use a current account as a working account into which their salary is paid and from which payments are made. If consumers want an account that pays interest, then a savings account would be a better choice.

Happy customers

While the OFT is concerned that only 6% of consumers have changed banks over the last year, Datamonitor research reveals that 91% of consumers were either ‘satisfied' or ‘very satisfied' with their bank, says Datamonitor financial services analyst Andrew Fabricius. ”So it is not a case of consumers being displeased with the services that are available. Current accounts are by nature basic products, so if they fulfil a basic requirement then most consumers will be happy.”

The OFT does, however, make a good point about the more vulnerable banking customers being hit hardest in terms of charges. Effectively this means that the poorest people, who might often inadvertently become overdrawn on their current account, subsidise the wealthier ones who do not have the same problems with account management, Fabricius says. “This is a separate issue, which does need to be addressed, but a return to up-front charging for basic banking products is unlikely to be the solution.

“Annual fees for basic services can actually exclude people from gaining access to banking services altogether,” he says.