This is nuts. UK banks want to charge customers for the privilege of handing over their money and letting banks gamble it in the global derivatives casino.
From the Telegraph:
A groundswell of support for change is understood to be gathering among the authorities. The Treasury’s advisers on the Independent Commission on Banking and the Office of Fair Trading are said to be also backing the proposals, alongside the treasury select committee and financial regulators.
Britain is the only country in Europe to operate a “free-in-credit” model of current account banking. Instead of levying fees on an account, lenders make their money through “stealth charges” on overdrafts and cross-selling of other products. Only India and Australia run equivalent models.
Regulators and officials want to reform the system to boost competition by making it easier to compare rival accounts. They also believe so-called “free banking” encourages mis-selling of financial products, exposes banks to compensation risks and lets customers down.
So the impression that bankers and regulators have seems to be that banks are doing customers a favour by holding onto their money and occasionally losing it all buying junk securities.
Nope. In a free market, banks that tried to charge customers for the privilege would be laughed out of the marketplace. Banks — by their very definition as intermediaries — generate profits from making good investments, not by charging customers for the privilege of holding their money.
Unfortunately this isn’t a free market, and banks can (and probably will) co-ordinate with each other to keep the market uncompetitive. Barriers to entry make it difficult to impossible for new players to enter the market and dislodge the status quo.
As the Office of Fair Trading noted in their must-read 2010 report:
New entrants to the retail banking sector face significant challenges in attracting customers and expanding their market shares, an OFT review has found.
The review of barriers to entry, expansion and exit in retail banking, published today, was launched in May 2010 to identify any obstacles blocking firms from entering the sector or from successfully competing against existing firms, as well as factors preventing inefficient firms from exiting the market and being replaced by more efficient ones.
Two words: banking cartel. Need I say more?
Anyway, I know what I will do with my money if my bank insists on charging me for the privilege of gambling my money: close my account, and find a bank that won’t charge. Even given the current barriers to entry, the opportunity to undercut the bigger players will be too good an opportunity to miss. And I’m sure lots of other people will do the same. Given that some parts of the UK banking industry (especially the Spanish-owned parts, and especially Banco Santander) are already looking shaky, does the UK banking industry really want customers pulling their money en mass?
As you rightly stated, this is normal in Australia. But we get not only monthly fee charges, but $20 late fees on credit cards, $2 ATM user fees if you use a competitor bank (Sometimes you are so busy you forget to pay your bill online because you no longer get paper reminders)
This is why Australia’s “Big 4” (Government promotes a 4 pillars policy to maintain TBTF status) have been market darlings over the last 15 years. Commonwealth bank was $4 when forst floated (Government bank sold to the rich) and is now $49 (In this economic climate). Not bad if you were an early buyer, with access to levered capital. I am sure the Politicians and their advisors got in early.
Other Australian privatisation deals that took money from the public good to the hands of the few. Look at the gain on IPO prices!
It is arguable that our banking system promotes stability and avoids bank runs. I would argue (Having worked in 1 of the Big 4) that it encourages bureacracy and overpaid upper level staff with jobs for life.
In other Australian news, if your rich, you can jump the refugee que. Good to see the 1% have migration mobility. Who says money does not buy happiness. We welcome corrupt officials fleeing their country before they are exposed. If they are really smart they will set up a not for profit charity and get all types of tax concessions.
BTW, regarding the FT 2010 reort, I would have to agree with its finding. Having worked in a new entrant to the Australian banking market, we found that the start up costs, spread over a low takeup customer base, was not profitable in the beginning, chewing up profits and requiring capital injections from the OS parent. Customer tend to be apathetic switching, are actually concerned about new untested banks (Despite regulatory supervision), and unless you offer fantastic rates and allow an easy appication process online (RaboBank and ING have been successful in Australia) you will have a very slow grind in customer growth.
My solution to a new bank is start with a fresh IT platform, ensure you have great databases to capture the information (Future loan decisions) and employ young keen staff who are prepared to learn the new fresh business model (Think Virgin business model). Utilise smart phones to do banking transactions (Linking their ID and account with a Telco who has done the registration and ID certification process and credit scoring) to minimise account application costs. Telco Bill payment history will provide initial credit scoring.
A program where children are taught financial literacy in primary schools will groom a loyal customer base for the future. Business ideas can be cultivated by “training” programmes. i.e. they create their own customer base.
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Do you think the banking “industry” can exist without a banking “cartel?” Puhhh-leeeeaaaaase.
The technique determines everything.
Of course it can. In fact it would be a stronger industry, because new players would be allowed to compete with the old zombies whose blunt skills keep requiring bailouts.
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If they took away the privilege of creating money from private banks a la http://www.positivemoney.org.uk/ I’d be on board with this.
All fractional banking gives the power to create money to private banks.
The problem, in my view, is the concept of debt-based wealth.
The positive money folks would agree.
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The system is rotten to the core.
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Credit Union and Serta mattress, problem solved!
Banks can fuck off if they think they are going to charge me so they can make even more money of my capital. They already tried this with BAO and it came back to bite them in the ass.
Way to quickly and easily induce a bank run…
I use a very simple principle regarding my money…
I will never pay someone else for its use or storage.