Wednesday, March 24, 2010

Need a bank account? Its yours

Yesterday the Times (UK) reported how there are leaked plans by the UK government to force banks to provide basic bank accounts to anybody that wants to open one. The Times article describes a basic bank account in this way:

Basic bank accounts allow individuals to pay in wages, benefits and a pension
and provide a cash card to withdraw money. The accounts are aimed at adults on a
low income or those with poor credit histories who would not otherwise be
approved for a standard bank account with credit facilities.

As I discussed in Banking the Unbanked, the UK is way ahead of even the most progressive US states when it comes to the availability and use of bank accounts to the poorest or most unfavorable (to the banks) customers. I referred to a figure from the UK Treasury indicating that 0.89 million individuals live in a household without access to a bank account, which equates to about 1.5% of the population. Since the aim of the proposed legislation is to provide access to banking to adults (not toddlers), my percentage calculation is probably significantly skewed. The Times article still states a very different number:

In 2003, the Government and the banking industry established the Financial
Inclusion Task Force
to improve access to banking facilities. Around 8 million
adults have basic bank accounts and between 2003 and 2007, the number of adults
without access to an account fell from 3.57 million to 1.75 million, according
to the British Bankers Association.

Whatever the numbers really are, legislation to include access to all adults with adequate identification, independent of financial background, have not been well accepted by the banking industry. Although many banks offer basic bank accounts, some still have restrictions around who may hold one. And commentators have said:

[...]that the increased costs associated with providing bank
accounts for all could lead to an end of free banking. Michelle Slade, of, the financial website, said: "Banks will inevitably face
higher costs if this legislation is passed, with the cost recovered through
standard banking customers. The change could be another nail in the coffin for
free banking, with banks looking to regain the additional cost potentially
through the introduction of monthly fees."

This is just resistance to change in my opinion, or a growing conservatism in the UK (although this is the Times, so the readership could never be described as left-wing). Quite frankly, the number of restrictions placed on basic bank accounts (you can put money in, only draw it through an ATM card, no check/cheque book, no overdraft, no interest), means that the costs to the banks seems to be outweighed by having a little more free money in the coffers.

If there ever was a low margin, low risk place to focus on improving business processes for maximum efficiency, the processes around these bank accounts have to be a good testing ground. As banking is gradually seen as a human right, along the lines of telephone, television and the Internet, oh and even health care (finally), the US banking system may need to start gearing up its lobbyists to prevent another terrible form of socialism seeping into US society (if you didn't hear the sarcasm in that, sorry - my inner-Brit escaped for a moment).

Or maybe the banks could spend the money they save on lobbyists and do the right thing for all banking customers, and "customers to be" -- fix the processes that cost so much per transaction that even pathetically basic bank accounts have to carry ridiculous charges.

A post from the Improving It blog

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BBA said...

British Bankers' Association here. Thanks for your interesting perspective. Over here, the whole discussion is mired in pre-election politics.

In the UK it is already the case that everybody can have a bank account if they want one, unless (and this is rare) the law says they can't. Every month 40,000 more people open basic accounts. So we don't see whether a legal obligation to provide such accounts would make any difference to this steady trend. We suspect this sounds like a bold bank-bashing initiative but (if it is even enacted) it would simply formalise what's already taking place. Anyway we'll keep on providing them, and we don't think the rate of take-up among citizens is going to change much as a result of this.

Roger said...

"... fix the processes that cost so much per transaction that even pathetically basic bank accounts have to carry ridiculous charges."

Is it actually the case that these processes do cost so much? Certainly I (and everyone else I have discussed it with) simply assume this is a scam for the banks to be able to squeeze more money out of their customers. In particular, inter-bank charges seem like a clever way of establishing a rigidly agreed charge framework between multiple banks whilst avoiding prosecution for anti-competitive collusion.

Phil Ayres said...

Roger, certainly there are some processes that seem to be fixed cost, and the politics of them could be considered dubious. The type of processes I'm thinking here are the everyday back-office processes that are performed - customer change of details, opening a new account, handling inquiries and so on. Anything that requires more than a single agent in a branch or call centre to handle. Although I agree that inter bank transfers can be costly, I think that presently that cost isn't obvious to that many people. Maybe there is a bunch of other stuff going on behind the scenes I should look at more closely.

If you have interesting background in any of these areas I'd love to hear about them.

Phil Ayres said...

Hi BBA. Thanks for the details. Do you have a link to a webpage with some more details around the numbers you've put here?

Also, you may be able to answer the question I have. Why are we seeing people griping about legislation if it is only about formalizing something that is already happening at little cost to everyday consumers?