The end of free banking

June 25, 2009

david Kuo-David Kuo is director at the Motley Fool. The opinions expressed are his own.-

Banks insist on the right to charge customers who go overdrawn on their current accounts. They also say they have a right to set the amount charged.

The Office of Fair Trading (OFT), on the other hand, claims that the fees banks levy on customers who exceed agreed overdraft limits are unfair. This is according to their interpretation of the Unfair Terms in Consumer Contract Regulations.

The ding-dong battle has been going on for years. Round One, which was heard in the High Court, went to the OFT. Round Two in the Appeal Court went to the OFT too. Round Three is being heard in the House of Lords.

The stakes are high. Collectively, banks that include Lloyds Banking Group and Royal Bank of Scotland stand to lose almost 2.5 billion pounds in revenues every year if they aren‚t allowed to charge customers up to 40 pounds a time for going overdrawn without permission. Additionally, banks will have to refund customers who have been wrongly charged in the past if they lose.

Banks probably have a good inkling they are on shaky legal ground. Consequently, they have been refunding charges, and often in full, when confronted by disgruntled customers. But from a moral standpoint, shouldn‚t banks be allowed to charge customers who abuse overdraft facilities.

And therein lies the problem. Should customers who neglect to take care of their finances be continually subsidised by those who ensure that they maintain a healthy cash balance at all times? On the other hand, should financially disadvantaged customers be further penalised to allow others enjoy free banking?

Neither is correct if we accept that overdrafts are a privilege rather than a right. And with today‚s sophisticated information technology, there is no earthly reason why banks cannot properly control the outflow of money from customers‚ accounts that would stop them from ever going beyond their agreed overdraft.

But then again, why should they? Don‚t bank customers have some responsibility to regularly check and ensure that their accounts stay out of the red?

Clearly mistakes have been made and correcting the mistakes will be costly. Banks will insist it current accounts are essentially loss-making and costs money to provide. But how much of that is the fault of antiquated banking practices that breed complacency and inefficiency.

The eventual outcome of the “unfair bank charges” case is a foregone conclusion. And a major shake-up of the outdated British banking system will happen as a result. Inefficient banks will attempt to mask their incompetence with a clumsy introduction of fees and charges. Efficient banks will cross sell and gain market share.

But banking as we know it will change.


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Don‚t bank customers have some responsibility to regularly check and ensure that their accounts stay out of the red?

True. I check my account on line about 3-4 times a day. However, the bank I use is regularly applying debits to the account over night and out of their supposed banking hours. Can I get the bank to do anything out of hours? Of course not.
Often a direct debit is applied Friday night for a Monday payment and taking the account overdrawn for the weekend. The banks response………………nothing.

Posted by Ian P | Report as abusive

In many countries no one is allowed to go into the red on their current accounts – for example, unauthorised overdrafts are illegal in France. If you need an overdraft facility then you must arrange it in advance and, of course, pay a fee. I don’t see why we couldn’t use a similar system here.

Posted by John C | Report as abusive