The end of free banking
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The end of free banking

Banks are arguably not the most popular service providers as many of their customers believe they are money-making machines that exploit their dominance in the market. However, there is another side of the coin, as regulation, consumer protection legislation and technology are making the running of banks an expensive venture.

When HSBC announced that companies banking with them have to pay a maintenance fee of up to €360 a year, businesses, understandably, were disappointed. The bank defended its decision saying the cost of providing banking services went up, reflecting higher regulatory standards that provide benefit to the overall financial system and those who use it. Malta Employers Association director general Joe Farrugia commented that HSBC’s “arbitrary” decision to introduce a monthly maintenance fee on businesses is certainly not welcome by the business community.

Malta is one of the few countries that have, so far, not charged customers fees to run their accounts. Free banking is now a thing of the past. Some banking experts argue that free banking came to an end when the EU announced the capping of fees that banks can charge shops for processing credit and debit card payments in 2015. It soon became clear that customers were going to pay for the capping of plastic card charges in some shape or form.

Banks are, of course, in business to make profits. It is not an unusual practice in many banks to cross-subsidise their services. This trend is slowly being reversed, with customers expected to pay for each service provided. However, customers are right to complain that the way charges are levied is not transparent.

Market forces will force transparency on the providers of banking services as customers will be able to compare current account charges and opt to bank with those providers that offer the best cost-effective package. Banks need to make it simple for people to compare the cost of running a current account based on their financial needs. While the local banking market is indeed competitive, the consumer protection agency needs to ensure that competition between local banks is not curtailed by the dominant position of a few operators.

Investment in technology is a must for all banks as the challenge of fintech companies that offer competitive selective financial services gets fiercer. It is, therefore, important for banks to adopt business strategies that ensure they are well financed and profitable to guarantee long-term reliable services to the community.

The low-interest rate scenario that has lasted for several years has been challenging for banks’ profitability. Most European banks are now charging a negative interest rate for balances held in customers’ accounts to offset the charge that the European Central Bank imposes on banks that deposit their excess cash with it.

HSBC’s move may be emulated by other local banks, as has happened in other countries. The era of free banking is regrettably over. However, one hopes that competitive forces will provide bank customers with a real choice as old and new service providers ultimately depend on attracting business by offering the best service at the right price to their customers.

If particular banks are overcome by greed, they will soon find that nimble service providers will erode their market share by providing better value for money thanks to cost-effective online banking services.

This is a Times of Malta print editorial

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