Earlier this week, FSA exec, Martin Wheatley, hit the business pages after suggesting that free banking no longer works in today’s climate.

He said “the reality is that if you are providing services free it is being subsidised from somewhere else”.

With interest rates so low, he talked about how the industry relies on selling “expensive products in a very aggressive way and that just destroys trust”.

This resonated with me as, only this week, my elderly step-mother experienced some aggressive sales tactics from one of the big high street banks.  Whilst telephoning to activate a credit card she found herself the victim of an insurance package hard sell and, flustered, found herself with a product that she did not want and could not afford. 

She came to me to see how she could extricate herself from this (see my Twitter account (@daniellesheerin) for my attempts and if you are interested in who the guilty culprit is).

This is precisely the sort of behaviour that erodes consumer trust (read the comments to this report on the Daily Mail’s thisismoney blog if you don’t believe me) - but Mr Wheatley is clearly right – the banks are in a bind.

They need to make money and the old models are no longer working, so (aside from badgering old ladies to part with their pensions) the obvious solution is to levy charges for their core services.

The problem is, the reputation of banks is so damaged by their current practices that this is not likely to wash with customers – they will want more for their money than just the same old outmoded services. 

Customers will seek out the bank that offers the best value above and beyond the basics and, research shows, they will be happy to pay for enhanced services.

In short, trust can only be rebuilt by providing customers with that added value – this means banks must offer new and better ways of doing things, rewarding customer loyalty, cutting costs for obsolete services. In short, helping customers manage their money better and listening to them when they tell them what they do and don’t want

We are starting to see this happen – Barclays PingIt, Barclaycards US Ring card and First Direct’s Lab are all steps in this direction and provide services that add value to the customers.

But this commitment to innovation and customer value needs to be embedded into bank’s long-term business models.  Or the banks will stagnate and become just another set of utility company’s trying to compete on who has the cheapest current account rates.

The difference is, however, retail banks are not like utility companies, customers have a choice about where they store their money, how they access it and invest it and alternative options for borrowing.

Consider the rise of credit unions, new banking models like Movenbank, peer-to-peer lenders and even alternative funding models like Kickstarter.

Banks are about to enter a new competitive era, and they must evolve their business models to survive it.