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« All work and no play makes Jack a dull lad | Main | Falling back »

Banking is free like the NHS is free

By davebirch posted Dec 17 2007 at 6:23 PM

[Dave Birch] Research based on the typical charging structures for banking in other countries indicates that should the UK banks be forced to scrap "free" banking then customers would be paying:

  • 32.9p per direct debit;
  • 34.2p for each standing order;
  • 23.9p for getting cash out of the bank;
  • 53.8p for card transactions; and
  • 44.7p to process a cheque.

They also add on a monthly charge for running the account of £4.13p. That sounds like a lot, but wouldn't it be better than having the costs hidden? By making the charging open and up-front, banks would be helping market to function more efficiently. The pricing of payment services would provide information for consumers to make informed choices -- where there's no proper pricing, there's no proper market.

But how does a card transaction cost 54p when a cheque costs 45p? Surely, insofar as banks know what anything costs, they cannot possibly handle a cheque for less than an card transaction. How does this come about? This is another example of how the lack of proper pricing shapes the model for retail payments. In the UK, current accounts are, theoretically, free. You can open an account and there won’t be any service charges accrued as long as you keep the account in good order. You’ll get charges for other things though, but those will be for other services you consume on the back of your free current account. You get subsidised to use inefficient mechanisms such as cheques and thus they perpetuate, but if banks allocated full costs to cash and cheques then consumers would go berserk and complain to their M.P.s and Watchdog.

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As it happens, cheques may not have much longer to go. The Payments Council, an independent body established to replace the Office of Fair Trading's Payments Systems Task Force earlier this year, is mulling plans to phase out paper-based cheques in favour of a UK-wide shift to automated and card-based payments. Cheque volumes now comprise 13% of UK non-cash payments compared with 64% at their peak in 1990. Based on current trends cheque volumes will fall at an average of over seven per cent per year over the next ten years so that cheques will account for only one payment in 50 in the UK market. Cheques are still widely used for person-to-person payments and payments to and from smaller businesses. I thought it worth remarking on the cheque situation because of the council's suggestion that they will consult on, and I quote,

whether the industry allows changes in customer behaviour and market forces to determine the rate at which cheques decline or whether there is a "proactive effort" to phase out cheques within a stated timescale.
And, in particular, the Council's statement that is "minded to pursue the second, more proactive option" due to the availability of automated payment options and increasing use of new technologies such as mobile and contactless payments. Cool.

In the U.S., the Treasury Department is taking action to drive cheques out of benefit payments and is going to award a contact for a bank to administer a pre-paid card programme to reduce the remaining 20% of benefit payments that are not direct deposit. The programme will begin shortly and go nationwide within six months. The reason for the programme is obvious. Many cheque recipients are unbanked. Since a typical electronic direct deposit into a bank account costs the Treasury about 9 cents, while a check disbursement costs about 89 cents (ie, an order of magnitude more expensive), these people are wasting tax dollars (to the tune of $100m+ per annum). They're not going down the proactive route yet, so benefit recipients will be able to choose whether or not to continue wasting tax dollars as the Fed is not prepared to make the transition mandatory "right away". Still, as in the U.K., it's only a matter of time.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]


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Yes, the subsidy of free banking really sucks, and the consumers lose because of the lack of transparency and the deadweight loss of transfers.

However the situation is more complex than just considering the "free banking" restriction. It is (again) because of the banking/payments franchise handed to the banks. Because banks/payments are a highly regulated business sector and given an implied licence to make risk-free profits, the quid pro quo is to deliver something "free" to the electorate.

So in order to move the banks/payment systems across to free market pricing, as opposed to free service, the franchise subsidy also has to be looked at. That is, if you take away the bribe to the public, they are liable to ask why it is that they now need to pay so much money, and the answer cannot be "market forces set the prices".

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