Free banking at risk as EU wants us to bank anywhere in Europe

Draft EU laws published today say that customers must be able to compare the cost of bank accounts across the EU on a like-for-like basis. But this would require many banks to change their business models, which vary widely across the continent, analysts say.

British banks might decide to fall into line with the widespread practice of charging for services, such as cash machine withdrawals, that are currently free in order to avoid being undercut on other services, reports The Telegraph.

The draft directive, which could become law in three years, says banks must provide consumers with a “fee information document” listing the most common services provided and the fees charged for each of them, drafted “using standardised terminology and standard formats, to facilitate comparison between the offers” of different banks.

“The problem is that pricing models vary from country to country,” said Gareth Lodge of Celent, a consultancy. “In France, for example, you pay to have the account, then you get a number of free ATM withdrawals, you pay to have your credit card but pay a lower rate of interest.

“So any price comparison will between apples and pears unless this proposal leads to a harmonisation of banks’ business models throughout Europe. This could hasten the demise of free banking in Britain.”

He added that, while the UK had an established system for switching bank accounts, many countries did not and would face large costs to establish one.

Mr Lodge also questioned the demand for cross-border account switching. “Would you really want to bank in Greece or Italy?” he asked.

Ralph Silva of SRN, a research company, said: “The problem with comparable and transparent banking charges is that each European country has a radically different infrastructure. Some countries emphasise different products and have built scale around those products, so they are able to offer lower prices on those products. The price comparison will not be fair.”
He added: “The overall cost of adding a new customer to a banking system is not trivial. If customers start bouncing back and forth, costs for the bank are going to go up.”

The European Commission said consumers “often pay above the odds” for the services they receive from their bank and “struggle to have clarity on the various fees charged”.

Michel Barnier, the European commissioner for the internal market, said: “By making it easier to compare fees and change bank accounts, we hope to see better offers from banks and lower costs.”

Other recent proposals from the EU have also threatened free banking. Customers could be charged for using credit or debit cards if European plans to limit or scrap the fees that retailers pay on card transactions go ahead. The move could also cause the bring about the demise of cashback on credit cards.

The UK Cards Association, which represents the debit and credit card industry, said the European Commission’s plans would hurt British consumers for little or no corresponding benefit.

“The British are used to, and like, free banking,” said Richard Koch, a senior executive at the Cards Association. “The commission’s model would impact on the card issuers’ ability to continue that.”

The commission is expected to issue a White Paper next month with decisions about capping the fees.

Under this week’s proposals, every country would have to have at least on bank offering “basic” bank accounts to all citizens, regardless of their financial circumstances. Each state would also be required to have at least one independent comparison website for banking charges.

Mr Silva said: “It makes sense to make access to a bank account a right in Europe. It’s impossible to live as a lawful citizen without access to a bank account or electronic payment method yet banks in many European countries have the right to refuse a bank account to a citizen.”

But Mr Lodge said: “While I support financial inclusion, forcing banks to accept customers regardless of profitability or risk moves the banks from a business to a social tool.”