How the end of free banking might actually be worthwhile for the consumer

Average household incomes in the UK have finally returned to pre-crisis levels, but after so many mis-selling scandals and financial impropriety this economic news has done little to alter people’s perception of their banks.

This has been exacerbated by recent calls from the Financial Conduct Authority for the end of free banking, backed up by major institutions like Barclays and RBS. On the surface this looks like it could be perceived as another initiative by banks eager to squeeze more money out of their customers in the face of tightening regulation and declining revenues from payment card interchange fees.

Yet those banks that do charge for accounts have found that their customers genuinely value them, according to Opinium Research. Sixty-eight percent of charge account holders believe their account offers value for money, and this is often because of included benefits such as car breakdown cover as well as travel and mobile phone insurance. 77 percent stated that as they use these benefits and rewards, they did not mind paying for them.

The trick for banks is balancing what they provide to customers with pricing that generates a return. The essence of retail banking products lies in customer value perceptions so if banks are keen to end free banking they need to be absolutely sure what matters to their customers, and align pricing accordingly.

This explains why simply rolling out charges for services that were once free, like ATM withdrawals or internet banking, won't work. People expect these services as a given, but there are other areas where banks can generate revenue by adding valuable services and products with charges attached. This will require a shift in how banks perceive themselves – from simple custodians of their customers' money to a position where they tangibly enhance their customers’ lives. 

This might sound more straightforward than it is in practice. In a recent study by the Collinson Group commissioned among business leaders in the financial services sector we found a clear mismatch between what board members and senior management perceive to be the key priorities in terms of investment and focus in the UK. Nearly half of senior managers stated their top priority for the year ahead was to improve the customer experience, but less than a third of board-level respondents held the same view. And while both senior management and board members recognise the main challenge impacting their organisation is customer profitability, with equal weighting on acquisition and retention, little is being done to directly address it.

Only 14% of senior managers and 29% of the board see recognising and rewarding existing customers as key to achieving their goals over the next 12 months. Perhaps this explains the slow adoption of charged bank accounts by the public. Research commissioned by our global loyalty marketing and CRM specialist agency ICLP and Forrester revealed that only 15% of respondents were members of bank loyalty programmes even though 68% said that they would value loyalty initiatives from their financial organisations.

So if we are to create an ecosystem where both financial service providers and customers can benefit, we recommend four areas for institutions to focus on:

1. Improved analysis - financial service organisations must do more to understand their customers and what motivates them as individuals, drawing on the huge wealth of data they have at their disposal. This would enable them to segment their customers based on both preferences and behaviour - and so appeal more directly to customers' wants and motivations.

2. Build differentiation – because it is very difficult to tell 'free' bank accounts apart, it is very hard for customers to find the best products and services and to switch. Offered benefits could feature more third-party brands like retailers and travel benefits, and be less reliant on the bank's own inventory. Greater differentiation will require and empower consumers to make more active, conscious choices, and then speak with their wallets.

3. Use behavioural insights to drive pricing – banks could show customers how they can lower their fees if they are more engaged with them, for example if they buy other products, reach credit card spending thresholds or introduce their friends to the bank. We have seen innovative banks like Alfa Bank in Russia go further and link savings rates to FitBit usage - the insight here indicating that customers who look after their health are more likely to look after their money too. Propositions likes these create a true value exchange, where both customers and banks benefit.

4. Embrace bolt-ons - The car industry has honed this to perfection. For every model there is a vast array of extras that allows the customer to specify the vehicle they really want. This is something that could be easily replicated in retail banking where bundled benefits can be tailored by consumers to meet their specific needs.

While none of these strategies could be implemented overnight, the right mix of benefits and pricing models, could help UK retail banking become more competitive, more innovative, and more dynamic than it has been for decades.