The great free banking myth

Perhaps more appropriate title would be 'when loss-leading goes wrong' or 'the true cost of free'.

A little journey through history:

Back in the 20th Century (feeling old now?) there was a major bank called the Midland Bank - so major that it constituted one of the 'Big 4' UK banks.


Between '87 and '92 it became part of the global HSBC brand, As ever the 'merger' was not a relationship of equals, Midland bank had made a series of mistakes which made it a necessity.

One of those mistakes was to start a loss-leading price war in 1984 by offering free banking. Strange though it may sound now, it was accepted as entirely normal that banking was a service for which you paid until that point.

This loss-leading offer was a success for a couple of months with customers bringing much needs cash reserves to Midland, Inevitably the other banks followed - and what had started out as a loss leader became a loss - the rest, as they say is history.

To this day all of the major banks are struggling to bridge the financial gap created by free banking, from selling 'value added' services such as insurances to punishing non-authorised use of accounts with ever-increasing penalty charges.

And there is the universal truth - just like lunches - there is no such thing as a free service.  Many would ague that 'they are there anyway, so it costs nothing' but that really misses the point. Whilst seeking free banking, most customers like to bemoan the lack of service, the closure of branches, the fact that there are no in-house managers to deal with their enquiries, the use of call centres etc.

Lack of service is the cost of free - whatever the sector, whatever the promotion.

Whilst the mainstream banks continue to wrestle with the challenge of valuing 'free' other banks, unencumbered by history are creating a strong niche in providing real service - which obviously you pay for. It is a great concept - and they are doing very well.

Whether you are buying or pricing your own service free really is not a commercial option!