Is the end of free banking on the horizon?

Times are tough at the moment. The uncertainty surrounding the COVID-19 pandemic has caused economic woe around the world. Yet as the Bank of England mulls over moving the base rate into negative territory, some challenger banks are already charging customers to hold money in their account.

Could this spell the end of free banking in the UK? We explore some of the issues and what they might mean.

What’s changed?

Even before the pandemic hit, the UK economy was growing at a fairly slow pace. To try and get things up and running in the months since, the Bank of England wants money flowing from the banks into the economy. Things like loans and mortgages are one way of doing this, with measures such as quantitative easing and cutting interest rates also a possibility.

In October, the Bank of England published a letter asking banks how prepared they are for a potential rate cut. However, the base rate currently sits at just 0.10%. So, a move would mean a negative base rate. This could have a variety of impacts.

One of the issues is that banks would potentially have to charge for holding cash, rather than paying interest. In reality, this means more fees or charges. The alternative is to reduce lending, but this is the opposite outcome of what’s intended.

However, this could also mean that lenders would pay borrowers on things like mortgages. Some countries have already applied negative rates, meaning that those with mortgages end up paying back less than they borrowed.

What fees are banks charging?

Of course, this interest rate slash hasn’t happened yet, and may not. But some banks are already charging customers to hold cash in a current account. In September, Starling Bank became the first UK lender to do so. Some customers have an interest rate of -0.5% on any balance over €50,000. These fees are to align the bank with rates in the Eurozone.

Other challenger banks are starting to follow suit. Monzo, for example, introduced fees to some customers.

There is now a £5 fee for card replacements (unless it’s been stolen or expired) and a 3% charge on cash withdrawals over £250 in the UK and EAA countries. The bank has taken steps to make sure the impacts aren’t widely felt, estimating that around 21% of its customers will be affected.

It’s not just smaller banks either. HSBC admitted they may have to start charging for basic banking services. A 35% fall in pre-tax profit during the third quarter of the year has seen the bank face difficult times, cutting 35,000 jobs.

Will all banks start charging all customers?

So, with these trends already emerging, does this spell the end of free banking in the UK? According to the Financial Times, more charges and changes could be on the horizon. Despite many people questioning the ‘free’ banking model, plenty of banks already charge customers for ‘premium’ features.

According to the FT article, banks could get ‘more creative in passing on charges to the masses’. So, it might not be a flat monthly fee, but it could take the form or more charges and fees for basic processes.

Whatever happens, it will be interesting to see whether or not the Bank of England cuts rates, and how high street and challenger banks will respond if they do.