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When is ‘Free’ Not Free?

Free banking is “a dangerous myth … customers may think their account is free, but the true costs are actually hidden.”

When is "Free" Not Free? in bold writing with coins and keyboard behind

Is all Banking Free?

Not a question that’s asked regularly, but a question that does need to be asked – “How much do you pay for your bank account?” The typical answer is – “Nothing, it’s free. Aren’t they all these days?”

Well, actually no technically free banking doesn’t exist and in this blog post, we will explain why.

As far back as 2012, Andrew Bailey, a senior official at the Bank of England, speaking on the BBC’s Today program, stated that free banking is “a dangerous myth” and that “customers may think their account is free, but the true costs are actually hidden.”

Personal Current Accounts

Fast forward to June 2014 when an initial study was released by the UK’s Competition and Markets Authority (CMA) which found that “Personal current accounts are not working well for customers”, highlighting concerns about “free in-credit banking”.

The outcome of this study brought about the onset of an 18-month CMA survey “Retail banking market investigation”, which was released in 2016. The CMA survey initiated changes being made across the banking industry – changes which can still benefit account holders to this day. Some of these notable improvements include:

  • Overdraft alert features to avoid charges, 
  • Service quality indicators meant that it would help customers to make an informed decision about which banking provider is for them based on customer satisfaction results,
  • Open banking services which helped to add more competition and user functionality to banking apps and facilities, improving user experience and adding more choice. 

Interest Rates are Still an Issue

Although banks have been told to be more transparent with their fees and interest rates. Not much has changed in the form of interest rates attached to a personal current account. 

In fact, it’s people who have lower credit ratings who will be paying a higher price. In April 2020, Monzo released their new overdraft fees which were based on the individual customer’s credit rating – with those who have a lower score paying around 39% APR compared to those with a better score only needing to pay 19% APR.

The distinct change in interest rates will leave individuals who suffer from a poor credit score spending more money each year paying off interest, which has the potential to increase the financial divide between some credit users. 

The Costs of Having a Credit Facility

But why do banks have to offer personal accounts in this way? The cost to the banks of providing ‘free’ accounts to those that remain in credit is reported to be £300 million per annum, and this cost has to be absorbed somewhere. 

This ultimately means that it’s down to those that don’t remain in credit to be hit with hidden fees and wider still, with interest rates lower than ever this means it’s much harder to see a return on your savings too.

Alternative Banking

So, it’s hardly surprising that the UK current account market is facing disruption. Entrepreneurs and bankers alike have seen the opportunity and sensed the growing dissatisfaction amongst UK consumers. 

There are now alternatives appearing within the sector (like us here at Suits Me) who offer an account paired with a prepaid debit card, admittedly they’re not free, but on the other hand, they don’t pretend to be either.

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