An end to the myth of free banking?

When starting a Scottish trust deed, debt arrangement scheme, debt management plan, or becoming bankrupt, most people are informed that they will need to open a new bank account. The reason is that most people owe their existing bank money which leaves them exposed to the risk of “set-off”.

The usual advice is to find a good basic bank account that meets your needs with a bank that you owe no money to. It’s also generally advised to find a bank account that is “free”. After all, if money is tight why pay for an account when there is no need to?

The whole concept of “free banking” is however increasingly being challenged. Many people observe that “free banking” almost always comes at a cost. For example:

1. If you lack the funds for a standing order or direct debit payment there will usually be a penalty fee.
2. If you go beyond your authorised overdraft limit a penalty fee is usually charged.
3. If you normally have a credit balance the amount of interest may be pitiful compared to a savings account.

Penalty fees often contribute to people getting into debt in the first instance and are widely criticised as they are most frequently paid by those that are least able to afford the charges. A series of £12 penalties could blow apart a monthly budget during a protected trust deed for example.

Many people actually now choose to use paid-for accounts during trust deeds and other debt solutions. One example is the Think Banking account. This account does have a significant benefit for anyone that often finds that they are hit with penalty bank charges; they cannot be levied on this account. However, if you don’t often get bank penalty fees the monthly charges for this account may be less justified.

Andrew Bailey, who will soon become a top bank regulator, has suggested that banks will need to be “helped” into making progress on this issue. A more transparent retail banking environment seems to be the goal. The problem for banks currently, even if they wanted to be more transparent about the cost of their “free” accounts, is that no single bank can introduce monthly account fees as standard without risking losing a significant number of customers to their competitors. If any of us were about to start a trust deed or debt arrangement scheme would we plump for a seemingly free account or a near identical one with a £5 per month fee?

That might suggest that banks should work together to increase the pricing transparency of their industry. This probably isn’t possible however as they’d leave themselves open to accusations of collusion and anti-competitive behaviour.

Andrew Bailey is therefore suggesting that regulatory or government action might be the only way to force this change. He hopes that a major benefit of clear bank account management fees would be a reduced inclination for banks to embroil themselves in the mis-selling scandals that have been haunting them for years.

While transparency and better sales processes would be welcomed, how many of us would really be happy to pay a monthly fee for our bank accounts given that we’ve been so used to not paying them in the past? How many of us would welcome paying a monthly fee during a tight financial period, while completing debt solutions such as a protected trust deed in Scotland for example?

We don’t like the current situation especially, but is the alternative any better? It seems that this debate has some way to run.

If you are soon to start a trust deed, debt arrangement scheme, debt management plan, or enter bankruptcy, you may wish to read our guide to some banks accounts to consider.