It is not fashionable to feel sorry for banks, but I’ve had a pang of sympathy this week – brought on by media coverage of ATM charges and cheques.
Banks are, by and large, businesses so they exist to serve their customers and to make money for their shareholders. And as we know, recently, they’ve not been very good at doing either.
Cheques are dying out. They seem increasingly like a relic of the past, involving hand written slips of paper being moved round the country. The cheque clearance system is fairly cumbersome, expensive to run and open to fraud. More and more of us prefer to pay using cards and online transfers and payment technology is evolving rapidly with text, contactless, NFC, Apps and various other options developing all the time. So it is little wonder that banks are keen not only to stop investing in the cheque clearance infrastructure, but to close it down altogether.
But the Payments Council (which runs this stuff for the banks) didn’t do a good job communicating the changes. The initial announcement that cheques would be abolished failed to address concerns about what would replace them. As a result we saw howls of anguish from groups including charities, pensioner groups and small businesses.
The Payments Council backed down and announced that cheques were safe after all. But not that safe, because the cheque guarantee card system had been abolished anyway, which means few retailers will want to accept a cheque.
But it got worse for the banks this week, with the Treasury Select Committee joining the party to insist that banks must invest in the cheque system and should also communicate with customers to tell them that cheques are safe.
Right now the best option for banks seems to be to wait this one out. With the rise of new payment technologies cheques will continue to decline and, to put it bluntly, the people who use them will die out.
But what in the interim? Perhaps some banks will start offering cheque books as an optional extra – if you want one then there is a small monthly charge. Or perhaps they will start charging a small fee for each cheque written. Interestingly enough a US Bank, Wells Fargo, this week started charging its customers for the debit cards.
RBS has been getting a lot of flack this week for stopping its one million or so basic bank account customers using other banks’ cash machines.
The Government forces banks to offer basic bank accounts. They offer most of the services that “normal” current account offer, but there is little revenue for banks. Unless customers have “returned items” (such as bounced cheques) there are no charges for normal use and there are no overdrafts, so no overdraft charges. And with low average balances the cash on float benefit to banks isn’t massive.
Basic bank account customers typically have poor credit records and are probably deemed by the banks to be less good target for cross sales. In short basic bank accounts are not profitable and are in many way part of the banks’ CSR programmes or just “the cost of doing business” in the UK.
Every time any one of us makes a withdrawal from “another” banks’ ATM our bank is charged a few pence. So who can blame RBS for trying to reduce the costs of its basic bank account portfolio? Well, as RBS could have anticipated, most people can! The move has been seen as targeting a vulnerable customer group unfairly. It remains to be seen whether RBS will tough this one out or, like the Payment Council make a U turn.
The bottom line here is that the current account market in the UK is completely distorted by “free” banking. The banking system costs millions if not billions of pounds to run. In fact the OFT said that the real cost of a current account was around £150 p.a., yet most of us enjoy free banking. Right now most of this cost is falling (unfairly) on people who pay overdraft charges.
Banks have endeavoured to generate revenue from current accounts by pushing “packaged” accounts hard. But these have come under increasing regulatory scrutiny. And this week a survey by moneysupermarket.com said that over half of those with a packaged account weren’t using the “added value” components.
Where’s this going to end? Well, if banks want sustainable, profitable current account businesses they are going to have to start having much more honest, straightforward conversations with customers about the real cost of the services they provide. Now there’s a communications challenge.