The announcement by the FCA that banks will no longer be able to charge the exorbitant overdraft fees that made them £2.4 billion in revenue in 2017 will have been a blow to many in the sector.
Inconsistencies between arranged and unarranged overdrafts will no longer be allowed, overdraft interest rates will have to be simplified, and banks must do more to help customers who are showing signs of financial difficulty.
These unauthorised overdraft charges disproportionally affect the most vulnerable customers who are struggling to manage their finances. The FCA has revealed that, in some years, more than 50% of banks’ unarranged overdraft fees came from just 1.5% of customers and that unarranged overdraft fees are also more likely to impact people living in deprived areas.
The idea that banks can offer ‘free’ account services to those in credit, while generating large revenues by charging often financially vulnerable customers excessive fees, isn’t right or fair – and I’m glad that it’s finally been exposed as just that.
Regulators could also turn their attention more to banks’ broader responsibilities. Banks could be fulfilling a positive social purpose and ensuring customers’ money is used in their long-term interests – for example to address the climate crisis, plastic pollution, biodiversity loss and other pressing social issues.
The myth of free banking
The reality is that there is no such thing as free banking – it’s simply a myth that we have come to believe is true here in the UK. Banking is a service and that service costs money, whether it’s the physical cost of manufacturing debit cards, the development costs of a banking app or administration costs to service an account.
Someone always pays for these expenses and high street banks have often recompensed the outlays in excessive unauthorised overdraft fees. Indeed, the FCA reports that some have been charging more than ten times what payday lenders charge for unauthorised overdrafts.
A better way to bank
There is another way of contributing to the costs of running a current account – simply to charge a fair monthly management fee. It’s something that Triodos Bank UK has done since we launched a current account in 2017.
By charging people transparently, we have challenged the common practice of high street banks and contributed towards the debate about how banks earn their money, as well as what fairer fees and charges look like. Importantly, we find that customers are happy to pay a small monthly cost for the added reassurance that their bank uses money purely for socially responsible and ethical purposes.
In line with our ethos as an ethical and transparent bank, we will not allow those with no prior arrangement to go overdrawn – removing the risk of people racking up debt at high cost. We have a fixed monthly fee and try to ensure other transaction charges fairly reflect the administrative costs to the bank – and we will review that further in light of the FCA’s announcements.
Unashamedly announcing this approach to charging was a bold move at the time, but the rest of the banking world now appears to be waking up to the need for transparency and fairness. Indeed, I believe many consumers are now mindful that they might be paying more for their ‘free’ banking through hidden fees and charges than they would do in paying a regular monthly fee.
There is much speculation as to whether the FCA ruling indicates the ‘death’ of free banking and if monthly management fees could become a new norm for the UK. A report by PwC in 2015 concluded that free banking is unsustainable and predicted the end of free bank accounts within a decade. I don’t believe that this will happen immediately – banks will be reluctant to make the first move and will potentially put up fees on other products, such as mortgages, to compensate – but it will be interesting to see where the sector goes next.
I strongly believe that tightening legal regulations is not enough – the financial sector needs to change from its core. Initiatives like the UN Principles for Responsible Banking, the Global Alliance for Banking on Values and the All-Party Parliamentary Group on Fair Business Banking’s workstream examining the social purpose of banks allow us to take a wider look at the industry and consider how the UK can lead the way in creating a stable, just and sustainable financial sector.
Banks shouldn’t wait for the FCA to penalise them or jolt them into change. It’s time that banks start to act responsibly and in the long-term interests of their customers – both in terms of their fair treatment and in ensuring they are lending customers’ money in a way that creates a fair and more sustainable future.
The Triodos Current Account
Our mission at Triodos Bank is to make money work for positive social, environmental and cultural change. Where you choose to put your money, and how your bank uses your deposits, can reflect your values and we only lend money to organisations and projects that are making a positive difference to society.
We’re the only 100% transparent bank – publishing details of every organisation we lend to, and invest in, so you know exactly where your money goes. That’s why Ethical Consumer, the UK’s leading ethical and environmental magazine, has rated the Triodos Current Account as having the highest ethical and environmental standards of any current account available in the UK.
This article was first published by The Ecologist in June 2019