Negative interest rates and the end of free bank accounts

The weekend papers were full of worry about negative interest rates coming to the UK. This isn’t a given (the implications for the banking sector aren’t good). But it is more likely than it was a few months ago, given that the Bank of England is clearly looking not just at the academic case for them but also the practicalities of introducing them (computer systems are only designed to deal with positive rates).

You can hear what John and I think about all this on the latest MoneyWeek Podcast (clue: not much) and in John’s Money Morning on the subject (if you don’t get our brilliant daily newsletter, sign up here).

Most commentators, one column in the Observer aside, seem to share our concern about the long term effects of turning the concept of money upside down. Former Barclays chairman John McFarlane summed it up in quotes in the Telegraph: negative rates, he said, risk causing a “massive dislocation” in markets. An editorial in the Times notes that it would “have damaging side effects that would take a long time to heal.” That might be fine, if there was any real evidence that they would achieve the main aim – stimulating the economy. There isn’t. “Whether they achieve the desired effect of stimulating demand and inflation, is debatable.”

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Still, in our world of something-must-be-done-ism, just because there is no evidence a controversial and disruptive policy works does not mean it won’t be introduced anyway. So what will negative rates really mean for you in the immediate?

The key thing here is that the UK’s banks will be being charged for having cash deposited at the central bank. They will be paying negative interest rates – and they’ll need to finance that by charging someone else to cover it. In theory, that someone else could be you – you could end up paying for the privilege of having cash in the bank. In reality, that is not particularly likely; it hasn’t happened in other places where negative interest rates have been introduced. Instead, negative rates are likely to be charged on very large balances only (mostly corporate and perhaps the odd very large retail account).

The thing the rest of us have to look out for is the introduction of negative rates as the trigger for the imposition of banking fees in the UK. The UK’s banks have been skirting around this issue for years. The fact that no obvious fees are charged on retail banking accounts does not of course mean that these accounts are actually free (the difference is made up with overdraft charges and the paying of no interest on current accounts). They do however – from the customer’s point of view – feel free. So what will change?

The CEO of Virgin Money offered some suggestions in the Daily Mail this week. He expects banks to “make slow and incremental” changes over the next few years to test exactly what we are prepared to pay for. It could mean upping rates on credit cards, mortgages and foreign exchange (I’m afraid no one is going to get paid for having a mortgage). Or it could mean paying for obvious services – fees for replacement debit cards, for example (something Monzo and Starling are already experimenting with). Eventually, it should mean that most accounts are fee paying. Negative interest rates are not the catalyst I would have chosen for this. But fee paying accounts are not necessarily a bad thing – after all, it does cost something to provide them.

The UK retail banking system has long been awful – shot through with hideously untransparent charges designed to catch the unwary, admin phobic and overdrawn out. The result has been an oddly unprogressive system whereby the poor pay, the well off often do not, and scandals appear with worrying regularity (PPI etc). It makes no sense. The introduction of low flat fees across the system might not make the banks perfect (decades of devotion to low-level dirty dealings will be hard to shake off) but they might at least change the dynamic that has been such a big contributor to their failures over the years.