Prueba de hipótesis

3.97 Suppliers appear, at least to some extent, to use net interest income and insufficient funds charges to cover the cost of providing core money transmission services and any fixed costs of maintaining the account (for example, maintaining a branch network, internet banking or sending out statements). This results in at least some within-product cross-subsidisation. This point was also noted in the Cruickshank Report.

3.98 The vast majority of account balances consist of credit balances (around £97 billion in 2006^A).

These credit balances generated a considerable amount of revenue (around £4 billion^Aof net interest income in 2006, a return of around four per cent on the total credit balances). The average unarranged overdraft balance over the year for the 16 banks was less than £700

95 Consumers who had switched current account in the past five years.

million^Abut involved some £1.5 billion^Ain paid item and maintenance charges. This is a return of over 220 per cent on the balances, excluding £1 billion in unpaid item charges. This source of revenue dwarfs the £79 million^Agenerated through unarranged overdraft interest on these balances.

3.99 The predominance of this charging model is unique to the UK (see Box 3.17). For instance, the European Commission’s comparison of charges across member states⁹⁶suggested that the United Kingdom was the only country where banks earned zero estimated revenue per transaction.⁹⁷

Box 3.17: International Comparisons

The evidence the OFT has looked at on account models in other countries indicates that free-if-in-credit model used in the UK is unusual⁹⁸. Other countries tend to use other price models such as transaction-based and monthly fees. This makes international comparisons difficult as most international studies of account prices have not considered all the features of the free-if-in-credit pricing structure.

The European Commission estimated the average account revenue per consumer in 2004 in 20 EU countries. They found that the UK had the fifth highest account revenue per consumer, below Luxembourg, Italy, Holland and Austria.

The proportion of revenue from insufficient funds charges is generally higher in the UK than in other countries. In general fee revenue from excess borrowing is below 10 per cent of total account fee revenue in the majority of EU member states.⁹⁹The exceptions are France, Spain, the UK and Cyprus where it is over 25 per cent.

There are three main methods of paying for an account,¹⁰⁰management fees¹⁰¹where the customer pays a fixed monthly fee in return for PCA services, transaction fees where the customer pays a fee for each transaction made (for example, direct debits) and the UK’s free-if-in-credit model.

96 Sector Inquiry under Article 17 Regulation 1/2003 on retail banking.

97 A recent UK report by Datamonitor pointed out that ‘overdrafts constitute an important revenue stream for banks because the majority of current accounts are not in themselves highly profitable […] the majority of current accounts do not generate much in the way of profits, given their low credit balances and heavy number of transactions that necessitate human input and labor. As such, overdrafts are an essential way for banks to make a profit out of offering current accounts.’ ‘An Overview of the Overdrafts Market in the UK’, Datamonitor, March 2007.

98 ‘The UK, however, does not fit in either of these (transaction based charges or monthly account fee) categories, but instead features an original pattern that relies on exceptions handling’ defined as debit card stop payment, cheque stop payment, document search and banker’s draft. ‘World Retail Banking Report 2008’, CapGemini.

99 Sector Inquiry under Article 17 Regulation 1/2003 on retail banking.

100 Sector Inquiry under Article 17 Regulation 1/2003 on retail banking.

101 Including packaged accounts.

The relative importance, by number of PCA, of the different account pricing structures in some countries is illustrated in the diagram below.¹⁰²

Countries: IT: Italy, DE: Germany, NL: Netherlands, AT: Austria, FI: Finland, ES: Spain, IE: Ireland, FR: France, CAN:

Canada, US: United States, SE: Sweden

In practice these models tend to overlap. For example, some accounts charge a monthly fee for a fixed number of transactions, with charges levied when this quantity is exceeded. Another example is accounts that do not face charges provided a minimal balance or monthly deposit is maintained.

The relative impact of different components of account price structure varies between countries.¹⁰³Sweden, France, Ireland and Spain have a high proportion of transaction fees influencing prices of the core banking services. In Germany, Italy and the Netherlands the price mainly consists of account management fees. While Canada has a high proportion of transaction fees, the core banking price of the US is 75 per cent based on transaction fees. In Australia,

‘exception handling fees’¹⁰⁴amount to a similar share as in the UK with account management fees as the second pillar.

3.100 In the current free-if-in-credit model, to understand the total implicit and explicit cost of an account, a consumer would have to know

• his or her average balance, the interest rate applied by the current bank and what rates may be available from other suppliers (or on other accounts offered by the same bank)

• the likelihood of using any arranged overdraft and the respective interest rates, and

• the likelihood of using unarranged overdrafts and incurring charges, the level of rates and charges and how they would be applied.

UK

DE

FR IE IT

US CAN AT

SE FI

NL

ES

Management fees model

Free-if-in-credit Transaction fees model

102 Source: OFT analysis of data from European Commission and Capgemini, 2007. For example almost all PCAs in Italy were classified as falling within the management fees model where as in Spain, for example, some are classified as management fees model and some transaction fees model.

103 Capgemini, ‘World Retail Banking Report’, 2007.

104 Examples of exception handling fees include debit card stop payments, cheque stop payments, document searches and banker’s drafts and unarranged overdraft charges.

3.101 Without understanding the implicit and explicit cost of a product it is difficult for consumers to work out whether they are getting value for money or to make comparisons across banks and to choose the most advantageous product in the market.

3.102 It may be the case that those consumers who are able to maintain a minimal average credit balance, and who avoid use of arranged and unarranged overdraft and transactions that attract fees, appear to receive a free account. However, it may take substantial effort on the part of the consumer to manage this and the consumer may not be able to maintain this behaviour over the course of their lifetime. Consumers who stray away from this, of which there are millions, do not necessarily enjoy free banking. However where consumers believe their account is free and when there is no clear headline price, there is unlikely to be a great incentive to switch.

3.103 Where some aspects of an account are free at the point of use for consumers, such as money transmission, the model must rely, to some extent, on revenue from other sources such as insufficient funds charges and/or net interest income to cover costs.

3.104 This matters because the free-if-in-credit arrangement may encourage excessive

consumption and/or under-consumption of certain aspects of an account. One effect (pointed out to us by some banks) may be the high use of core money transmission services, which the customer perceives to be free.¹⁰⁵This may have effects on efficiency, as certain aspects of the account may then be over-used. Customers may also keep disproportionately large credit balances in their accounts to avoid insufficient funds charges and this could increase the amount of interest forgone. Alternatively they may over-use unarranged overdrafts because they fail to realise the costs associated with doing so. However, banks may have little financial incentive to prevent consumers from entering unarranged overdraft as

insufficient funds charges represent a considerable share of PCA income. These issues point towards possible inefficiencies from the incentives created by the free if in credit model.