Money for nothing?

The announcement by Mr Justice Andrew Smith on 24 April once again turned the public eye onto the way in which British retail banks charge for their services.

While the judgement was keen to point out that these charges were not unnecessarily unfair, it did take the debate to a new level, one which the UK banks had sought to avoid.

The fairness or unfairness of bank charges will rumble on for some time yet, however the winds of change are moving through the UK banking industry and the charging policies they have followed for so long are likely to be swept away in the coming months ahead.

To put these changes in context, an analysis of banking services across the globe shows there are four main categories in which fees are charged namely:

• Account management: fees charged for the administration of an account

• Payments: fees charged for a specific payment transaction

• Cash utilisation: fees charged for depositing or withdrawing cash

• Exceptions handling: fees charged for other services such as payment stops or document searches.

It is the combinations and amounts of these charges which form part of the fee structure of retail banks and in this regard the UK structures are truly unique. No other country comes close to the approach followed by UK banks for charging fees. Even countries with a similar level of financial services industry maturity have not elected to follow the UK model.

Based on an average consumer the amount of charges levied by UK retail banks are broadly in line with the global marketplace.

A recent report reveals that the UK consumer pays on average 75 euros in fee charges each year. Low users of banking services pay only 14 euros while high users can expect to pay on average 122 euros. This multiplier between low and high users is nearly nine times compared to the global average of three and a half times, and does show that in the UK consumers pay for what they use.

However, it is composition of the UK fee structures that sets them apart from all other countries. In the UK the leading retail banks charge 52 per cent of their total fees against exception handling items, with a further 43 per cent against payment related services. Charges related to managing of standard current accounts are small and there are no charges for cash withdrawals. Consumers can be charged for bundles of services associated with the current account but to all intents and purposes, provided you remain in credit, current account management is free in the UK.

In light of the court ruling it is natural to speculate as to where UK retail banks go from here. In this regard they must carefully consider their options, all of which have implications for revenues, customer behaviour and ultimately customer satisfaction.