Are we facing the end of free banking?

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New fees signal an end to free banking', runs the headline on The Times today.

First Direct has announced that it will charge customers £10 a month for the privilege of having one of its current accounts - unless they deposit £1,500 or more a month into the account.

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Other banks have said they have no plans to introduce such charges - but they certainly haven't ruled it out, and you can be sure they'll be keeping an eye on what happens to First Direct.

So is this really the end of free banking?

HSBC-owned First Direct is introducing the £10 charge on its current accounts from next February. According to The Times, it reckons that 200,000 of its 1.3 million customers will actually have to pay the charge - a substantial number.

Part of the problem facing banks is that all the less transparent ways in which they make money are now being cracked down on by the Office of Fair Trading. There's the £5bn a year they make in unauthorised overdraft charges, which the OFT is considering capping.

Then of course, there's the trade in the almost utterly useless Payment Protection Insurance, also being probed by the OFT. This has been a nice little earner for the banks who have been slapping it onto their credit products, at vastly inflated prices, without really mentioning it to customers for many years now.

So you can see why they're trying to come up with other wheezes to make up for the lost charges. But can charging for current accounts really work?

David Black at Defaqto says: "First Direct has created a sort of halfway house of a fee-charging account and we are going to see a stream of similar accounts in the future. They are trying to corner the affluent end of the market."

But this seems the wrong way round to us. They're not trying to attract affluent customers - after all, who wants to have the added hassle of making sure your current account is always topped up enough to avoid fees, particularly when it doesn't offer any substantially better extras or interest rate than other top accounts?

What First Direct is really trying to do is get rid of its most costly customers - in other words, customers who don't have much money in the bank, and who are also unlikely to take out any of its other products. No bank wants to hold onto those customers who have a forgotten £1 sitting in a current account theyve neglected to close, for example.

You'd have to be earning at least £24,000 a year to be able to put a £1,500 salary in the bank each month - which means that, like it or not, it's the poorer end of First Direct's customer spectrum that looks set to suffer. However, the bank has very kindly said that those who can't make the £1,500 a month payment can have it waived by taking out a credit card, mortgage or savings account with them as well.

So effectively, First Direct is saying - if you're not actually saving much money with us, and you're not planning to borrow any money from us, then we can't be bothered subsidising you. So either we charge you £10 a month, or you take your business elsewhere, and either way it ends up costing us less - which will hopefully offset all the money the OFTs going to take from us.

It's an interesting strategy. In reality, it could work. If you already bank with First Direct, and you earn more than the hurdle rate, it's unlikely you will bother to change accounts simply because it might charge more one day. And as we've already pointed out, most of the business lost will be custom the bank doesn't want anyway.

But the prospect of potentially rising charges could well put off new customers. And with politicians currently very interested in the banking sector and the provision of banking services for those who can't normally get credit, this type of account will certainly generate some bad publicity. It's true that in many other countries, theres no such thing as free banking, but here in the UK we take it for granted. Look at the uproar surrounding fee-charging cash machines.

First Direct's competitors will certainly watch its new account very carefully. But some might decide there's more of a business opportunity in taking the moral high ground, promising never to charge customers, and generating more new business that way. We wouldn't declare the end of free banking just yet.

You can read more about the challenges facing the UK banking sector in this week's issue of MoneyWeek, out on Friday.

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Turning to the stock markets...

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The FTSE 100 closed in the red yesterday, as weakness in the utilities countered renewed strength amongst mining stocks. The blue chip index ended the day 7 points lower, at 6,186. M&A rumour saw credit checking agency Experian top the leader-board, whilst BSKyB was the biggest faller on negative broker comment. For a full market report, see: London market close

Shares also closed lower on the Continent, tracking early weakness on Wall Street. The Paris CAC-40 index fell 14 points to end the day at 5,476. In Frankfurt, the DAX-30 was 6 points lower, at 6,387.

Across the Atlantic, a late rally saw the Dow Jones climb 86 points to a new record high of 12,218. The industrial index was boosted by gains for Wal-Mart, Home Depot and Intel. The tech-heavy Nasdaq rose 24 points to end the day at 2,430. Meanwhile, the S&P 500 set a new 6-year high of 1,384, a 3-point gain.

In Asia, the Nikkei ended the day 46 points lower, at 16,243.

Crude oil last traded at $58.56, whilst Brent spot was at $56.05.

Spot gold was little changed at $622.75 this morning. Silver had fallen to $12.78, down from $12.80 in New York late last night.

And in London this morning, the UK's third-largest supermarket, J Sainsbury, announced that first-half profits had more than doubled as Britons were prompted by price cuts and good weather to buy more food and drink. The retailer's net income rose to £127m in the period ending October 7th. However, the company warned of rising energy costs in the second half. Shares in Sainsbury's had fallen by as much as 1% this morning.

And our two recommended articles for today...

Why gold is the odd commodity

- Gold, silver, their shares and the resource shares have finally started to rise. But even if other commodities fall in the event of a global slowdown, gold's uptrend could continue. To find out why gold is unique, and what lies in store for the metal and its mining stocks, see: Why gold is the odd commodity

The two key issues facing the global economy

- Warren Buffett once called them 'financial weapons of mass destruction'. They've brought the market down before and - with even the most sophisticated of investors not fully understanding how these complex financial instruments work, or the risks involved - they could do so again. To find out what derivatives are, and why they're so dangerous, see our recent cover story, just available to all Money Morning readers: The dangers of derivatives