Free banking in question

Study  from the UK's competition authority, the CMA, questions the value of free banking.

The worry is that while free accounts look attractive to the user, they result in banks hiding charges elsewhere -- for overdrafts, for instance - and not bothering to compete with each other with better value or service.

The study says :

It is also possible that there might be a degree of cross-subsidy in the PCA (Personal Current Account) market, which may be distortive of competition. Indeed, the 'free if in credit' model often involves cross-subsidy by other revenue streams for PCAs such as overdraft charges. In addition, we were also told that PCAs as a whole were loss-making. If this were the case, this could suggest the existence of a cross-subsidy from other retail banking products. 

2.67 This seems to suggest that there might be a degree of cross-subsidy between activities within retail PCA providers which, if true, could itself be distortive of competition. It might also represent a barrier to entry and expansion.

2.68 It is also likely that the pricing model used by PCA providers generates significant cross-subsidies between different categories of customers. PCA providers incur fixed costs to provide PCAs, but under the 'free if in credit' model PCA providers do not charge a monthly fee for using PCAs. Instead, they derive the majority of their revenues from NCI and overdraft charges. This pricing model is unlikely to be perfectly cost-reflective, and it might result in cross-subsidies between different categories of customers. For example, customers who use their overdrafts regularly and customers who keep large balances on non-interest-bearing accounts may subsidise other categories of customers which could, in itself, be distortive of competition.