The Law Of Unintended Consequences

When, in 1984, the marketing team at Midland Bank first removed charges from some personal accounts, they couldn't have guessed at the long term  consequences for the UK retail market.  At a time when cross sales of new services like mortgages and structured savings products was beginning to drive retail revenues, their objective was to win more current account customers and thus create a pool of potential.

Over the ensuing 25 years, free banking has come to be regarded as a right but cross sales have never realised the potential of that early vision. Whilst banks have had some success with packaged products, any suggestion that free terms might be withdrawn is met with strong protests from the popular press.

This creates a dilemma for the modern product manager. If clients won't buy add ons, the only way to improve profitability is to drive down costs.

Perhaps the costliest element in the current account wrapper is the cheque. Even if the paper no longer flows back to the account holding branch, books must still be printed and the data subsequently captured and stored. Since the debit card does the same basic job more cheaply and with greater utility, UK banks would like to follow the declining usage trend to its logical conclusion and withdraw cheques altogether.

In a world of chargeable services, this would be achieved through pricing. If cheques were priced at a multiple of debit card transactions, usage would migrate rapidly to a point where withdrawal could be easily justified. In a world where banking is free, however, there is no incentive to migrate and consumers insist on their continued right to issue cheques. Small charities make no attempt to collect funds by other means and therefore perceive that cheque withdrawal would have catastrophic consequences, whilst politicians defy gravity by arguing the lack of any business case.

 It is far from clear where matters will go from here. All parties seem deeply entrenched and banks are distracted by the need to nurse damaged balance sheets through the ongoing economic malaise.

One answer is to improve the alternatives but so far no one has really tried tailoring their service towards hardcore cheque users. Substituting new media payments won’t work because these customers are too conservative to find them accessible. Telephone banking through call centre operatives or a simple automated interface offers more promise although authentication is an issue and costs in this channel are relatively high. Prepaid cards could replace cheques sent as gifts but are also relatively expensive if not reused.

Pricing may be a lever. If cheques were chargeable at (say) 50p each, or offered only within packaged accounts, usage would rapidly decline, whilst lobbyists would find it hard to argue the end of civilisation. The first bank to break ranks would still face hostility, however, and - understandably - no one seems keen to assume this role.

The cheque therefore seems set to be a product manager's nightmare for some time to come. Its persistence may be the result of unintended consequences, but that doesn't make it any easier to deal with. In the world of payments, attempts at substitution all too often become additional.