There’s no free in free bank accounts

The era of ‘free for all’ banking may soon be over. Already under threat, its demise is accelerating as the inherent unfairness of ‘free banking’ becomes more apparent, forcing an avalanche of change in banking IT.

The recent PwC report “There’s no such thing as a free lunch” labels free bank accounts as “unsustainable”. Putting free banking up for debate will force sleepy bank customers out of hibernation. Many typically trust just one bank to look after their personal financial affairs for decades. If the permafrost of free banking starts to melt, new laws may be just the tip of the iceberg.

For some bank customers value is not always defined by how much their savings return. The relationship between the bank and customer may involve customers gaining benefits outside of banking from the retail, fitness services they already pay for with other suppliers. Early attempts to move away from the free banking model have already been made. Santander’s 123 Account, rewards qualifying customers in a way its ‘free’ accounts do not, offering discounts and cashbacks in exchange for customer loyalty.

The end of free banking though will not benefit everyone, especially those on lower incomes who cannot make overdraft payments. Banks have successfully limited their risk just by keeping risky customers at an arm’s length. Banks have agreed to provide charge-free basic accounts to customers, giving all customers access to banking services. With this new regulation in place, banks need to work out how they support charge-free customers without incurring losses.

The longstanding ‘free-in-credit account’ model, will mean less creditworthy bank customers no longer subsidized by those ‘less risky’ for the banks. To date the risk of bank account default is effectively ‘pooled’, rather like the insurance industry. This pooling offers poor value for the creditworthy seeking to maximise their returns.

For this to change and to deliver value banking to each customer segment, smart banks would look beyond the transactions their customers are carrying out daily and explore the experience faced by each customer in-branch, online or on mobile. Over time this will involve the development of a ‘middle layer’ of functionality to match customer profiles with highly customized offers. Today most banks, thanks to ‘free banking’ have avoided this.

In the ‘post free’ customer-centric banking model, personalized offers will need to be market-tested for popularity and of course, assessed for profitability constantly, requiring a degree of customer experience orchestration not seen to date in the UK banking sector.

The consequences of the end of free banking are profound. Branch offices, previously seen as critical to continued customer loyalty will need to compete with lower cost ‘omnichannel’ alternatives such as e-banking, tele-banking, banking apps or even the Skype-like interactive video services recently announced by Barclays in the UK. For UK banks though, the savings from selling off expensive bank branches though may be more than enough to cover the IT costs associated with providing wider choices to customer.