There is no such thing as a free bank account – just as there is no such thing as a free lunch.
The reason most UK banks offer current accounts without fees attached to them is that the costs of running each account is generally recouped through the fees charged when people exceed their overdraft limits or take out add-ons such as payment protection insurance.
In other words, one way or another, the customer ends up paying.
That’s the main basis upon which banks have been threatening for years to start imposing those charges on their accounts.
Moreover, in continental Europe most banks charge fees, so why should Britain be any different?
Sir David Walker, the incoming chairman of Barclays, has been making such arguments for some time – his latest justification being that had banks been able to charge for current accounts they might have been less likely to indulge in some of the mis-selling they got up to in recent years.
However, while this position is technically correct – and while it would indeed be economically more honest to charge for bank accounts – it also betrays an ignorance of the importance of behavioural economics.
Quite simply, we attribute an unexpectedly large premium to things which we get for free.
The economist Dan Ariely underlined this in an experiment he carried out (in chapter three of his book, Predictably Irrational): he offered students a Lindt Truffle for 26 cents and a Hershey’s Kiss for 1 cent.
At those prices, 40% of students went for the truffle and 40% went for the Kiss. They then dropped the price of both by just 1 cent and suddenly 90% went for the free Kiss.
The relative price difference was precisely the same, but the fact that the Kiss was now free generated an enormously powerful response.
Getting rid of free bank accounts would be controversial because, traditionally speaking, people don’t like being charged for something they always thought was free.
And, if the inverse to Ariely’s experiment is true, any bank which starts charging for its accounts might expect a sudden and violent exodus of customers.
Now, it’s quite conceivable that the inverse might not be true. For instance, some newspapers which used to have free websites are now starting to charge for them and declare that business has not collapsed (although the evidence for this policy’s success or otherwise is still rather thin).
The controversy over banks charging for current accounts underlines one of the key weaknesses of those who manage Britain’s big financial institutions.
They are all too prone to justify their practices based on demonstrable principles while ignoring the public mood.
Take remuneration: even after the onset of the crisis, many bankers paid themselves large bonuses because they had performed well based on the criteria laid down by their remuneration committees – even though it was plain to see how controversial such a move would be. They were then apparently surprised at the public backlash that ensued.
Banks are at risk of making the same misjudgement with current account fees.
Yes they are economically dishonest; yes they probably should always have been charged.
But forget about the orthodox economics of it: imposing fees would provoke yet another banking backlash.
Surely that’s not what Barclays wants right now.