Virgin Money will become the
first UK bank to launch a compulsory fee-based current account
later this year, arguably bringing the end of free banking a step
closer. Virgin says that customers will accept a low but regular
monthly fee, while it has promised overdraft charges will be ‘fair
and transparent’.
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Every customer signing up for a Virgin Money current
account, regardless of how much is deposited initially, will have
to pay a monthly fee, according to Virgin spokesman Scott
Mowbray.
While the fee may be set as low as £5 ($7.47)
per month – the bank declined to give an exact figure – Mowbray
told RBI the fee charging basis will be “fair, transparent
and simple,” but the exact level of the charge remains a “work in
progress”.
“People know what they are paying for and it’s
not a cost-up device system whereby customers that can afford the
big charges on overdrafts are paying for what other people know as
free banking,” Mowbray added.
The bank argues that by charging all customers
to use an account, in line with the European and US banking model,
users in the red will not have to subsidise those in the black “in
the shape of authorised and unauthorised overdraft fees”.
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By GlobalData“It is different, it isn’t what people know but
of course the retail banking model that we know hasn’t necessarily
worked for the benefit for consumers,” Mowbray added.
“Something has to change.”
He said that, at the moment, all of Virgin
Money’s products are based on a partnership model. For example, the
deposit account is backed by Royal Bank of Scotland.
Having successfully obtained a banking licence
in January from the UK regulator, the Financial Services Authority
(FSA), business can be written to Virgin Money’s own balance
sheet with plans to launch a full banking service later this year,
including savings accounts, cash ISAs and mortgages.
But Kevin Mountford, head of banking and credit
cards at price comparison website moneysupermarket.com was
sceptical, calling Virgin’s latest announcement a “clever
ploy”.
“Unfortunately the nature of the beast is that
consumers who manage to stay in the black, which is the majority,
are used to technically free banking. I think Virgin is going to
have to do something very clever to justify this to the majority of
people,” Mountford said.
He added that moneysupermarket.com saw a lot of
“kickback” from its users in response to the news, “because equally
you can say why pay for somebody who can’t manage their own affairs
[ie, those who are charged for unauthorised overdrafts]”.
For Mountford, the bank is doing one of two
things; either sensing the response to an idea that may not come to
fruition, or pre-empting something that has already been decided,
to ease the “shock” when it comes into practice.
Free banking has come under threat in recent
years but a High Court ruling last November determined that bank
charges are not subject to regulation by the Office of Fair Trading
(OFT).
Left-field move
Mountford said Virgin Money’s
“left-field move” would help diversify the UK banking market,
despite the negative reaction.
“We have got a very healthy model in the UK and
it is actually a vibrant market compared to a lot of other
countries,” he said.
The fee-based system creates “more of a level
playing field, as opposed to extremes, from those in the black
paying nothing, and those in the red reaching extortionate
levels”.
Mountford also predicted that the cost of
authorised overdrafts will drop below the £30 mark, more in line
with what customers think it should be; sources close to the OFT
have suggested a “fair” limit is closer to £10.
Virgin Money remains positive about its
customer offering in an otherwise crowded retail banking
market.
“I think whatever we do will absolutely be good
enough because at the heart of everything we do we have our
customers at the centre of it. Time will tell,” Mowbray said.
News of Virgin’s fee-charging strategy
coincided with release of a report from the FSA, warning that
product bundling can create risks for consumers and suggests
packaged bank accounts do not always represent good value for
money.
“Some may find that where add-ons are insurance
products, they do not provide the expected level of cover,” the FSA
reported.
“The potential for consumer detriment, although
not likely to impact any individual consumer significantly, could
occur across a large population; around 15% of UK adults have some
form of packaged account.”
It is a market that will be worth around £1.6bn
in fees for 2009, and according to RBI estimates, worth up
to £2bn per year over the next five years (see RBI 616).
Separate market research by UK-based market
intelligence firm CACI puts the number of packaged current accounts
at 9.4m, or 14% of the 69m active current accounts in the
country.
By contrast, Santander has widened the
availability of its ZERO account.
The fee-free current account was rolled out on
11 January for its mortgage customers (see RBI 623) but less than two months
after its launch, the account has been made available to customers
holding a Santander investment product.
As for Virgin’s distribution strategy, it
continues to be linked with another bid for Northern Rock, the
failed lender it tried to buy in 2008 prior to the Rock being
nationalised.
Virgin Money CEO Jayne-Anne Gadhia has set a
five year timetable to establish “a significant number of
branches.”
