Why free banking works for the well off

Do you think that banking is free in Britain? I suspect not. Most MoneyWeek readers will know that running a current account costs something, and that if the cost isn’t met directly it will certainly be met indirectly. That’s the point that consumer watchdog Which? was trying to make last week when it released a report claiming that, due to huge overdraft charges and the like, there are some bank customers paying up to £900 a year to run their accounts. It called for more transparency over costs and charges, “so that people can clearly see what they already pay”.

Virgin Money chief executive Jayne-Anne Gadhia appears to agree in an interview with The Sunday Telegraph. The fact of the matter is, she says, that “I don’t think many people do genuinely get a free bank account”.

That’s not just because of the charges some customers are hit with. It’s also because of what the industry calls “interest forgone”. Very few current accounts pay any interest, so “you’re keeping money in your current account on which you could earn money but you’re not earning money on it”. That may not be an instantly measurable cost, but it’s an opportunity cost.

Virgin is to launch its own current accounts next year. Gadhia tells The Daily Telegraph that one will be free and “transparent”, while the other will allow you to “choose to pay for extra services”. This is, of course, the way the industry is already heading. There are now 56 so-called ‘packaged accounts’ in Britain charging a fee, and there are many more on the way – M&S, for example, is launching a £240-a-year account in the autumn.

But this new trend might not suit MoneyWeek readers. After all, if you stay in credit most of the time and only occasionally run into (authorised) overdraft, you won’t be the one paying most of the costs associated with your account. You won’t be paying credit card-style interest rates and you won’t be hit by fixed-rate overdraft charges.

You will be suffering from interest forgone, but that isn’t worth much these days and you will be getting a place to have your money held securely (well, relatively securely anyway); the ability to get your cash out from an ATM any time you fancy; somewhere to have your salary or pension paid into; and the facilities for moving your money around by direct debit. It isn’t bad really.

The fact is that while the UK system might not be great or particularly fair for the financially challenged, it works pretty well for those who manage their money well. Something to think about before you sign up for any of the new accounts on offer.

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