Free banking didn't cause misselling
With the UK Parliament about to launch a major review of standards in banking, there is much talk of free banking being one of the problems that led to poor behaviour by the lenders. However the two issues are quite separate and there is no evidence that shows the two items are related.
One of the primary reasons behind the PPI (Payments Protection Insurance) misselling scandal was that the banks began to believe that they were retailers. As a consequence they started hiring retailers into the banks, people who had no understanding of either banking or the essential values of banking. Many of these retailers came in from white goods retailers where the model is to sell a product, be it a fridge, a television or a camera, at a highly competitive, loss-making price and then make all the profit from selling them an extended warranty on the product at a very high price and with high confidence that the customer will never claim on the insurance because they’ll either forget they have it, not understand how to claim on it or what happens to their product will not be covered by the insurance. In this retail model there is absolutely no need or desire to build a long term relationship with the customer.
This retail model was launched in retail banking whereby mortgages, personal loans and credit cards were ‘sold’ to customers as prices that the banks were not making any money on. This was because there was so much demand for credit that wholesale interest rates rose and so much competition for customers that retail prices fell. As a consequence if a bank wanted to be in the retail lending space they needed to find another way to make money and this is where the retailers told their ‘not so smart’ banking colleagues about the secret of their success – extended warranty. Of course no banker worth his salt could allow the customers to realise that banking is essentially a simple business, so a more obscure, erudite, confusing name for the product had to be created and hence PPI was born.
Getting rid of so-called free banking is not going to change the ways that bankers will look for new ways to make money; that has been a fundamental characteristic of banking since the industry began.
However there has been a recognition amongst most of the banks that trying to emulate the retailers was a failed experiment. Retail banking is not retailing. Mass retailing is anonymous and transactional, it is not about building a relationship, it is not about the long term. Gone are the coffee shops in banks, gone are the branches that look like retailers and gone, hopefully, is the pile ’em high, sell them cheap offers from the banks. What needs to be ensured is that culture does not return and that the leaders of the retail banks are led by people who have a deep foundation of retail banking and live the values required for long term relationships.