This is not just any fee-free current account, this is a Marks & Spencer fee-free current account

Marks & Spencer have announced that they are to launch a fee-free
current account. The account will have no overdraft fees, the first £100 of
which is interest free and a (relatively) low interest rate for overdrafts of
15.9%.  For those who transfer their main banking account to M&S they will receive a £100 gift card. A key attraction for M&S customers will be the loyalty scheme where
points are earned for debit card spending in M&S stores and online. It also
passes the critical requirement of allowing customers to bank online as well as
on the phone or in store.

A key differentiating feature is not charging a transaction fee for ATM cash
withdrawals made with the debit card abroad. For both Metro Bank and Nationwide
the lack of transactions fees when abroad attracted customers; however that
feature was withdrawn and both now do charge fees for transactions abroad.

On the face of it this is a competitive offering and should be attractive to
to both M&S and non-M&S customers alike.

This is not a new market entry for Marks & Spencer (they launched their
fee-charging account with a similar loyalty scheme in September 2012) but
rather a change of their positioning re. free banking. M&S claims that
their fee-charging account has been successful with M&S customers, so this
does raise some questions as to why they should launch a fee-free product and
at this time.

One of the dangers to M&S of having similar current account products
with one offering a fee and one not is self-cannibalisation. Will customers of
the current fee charging account be happy to see that whilst they are paying a
fee other customers are not paying one for what seems a remarkably similar
product? Will some of those customers look to switch to the fee free product? M&S is allowing these Premium Customers to switch their accounts to the free one and will even give them a £100 gift card if they switch their main account to M&S.

Of course this is not just a current account this is an M&S current
account. Except it isn’t. It is actually an HSBC current account as it is HSBC
that is not only behind M&S Bank but owns 50% of the bank. While M&S may position itself as being good
for current account competition in the UK market, with HSBC behind it the
impact on the market share of the Big Four banks will be none.

Another question that M&S will, hopefully, have considered is what types
of customers will be attracted to this account? With no mandatory minimum
monthly amount that needs to be paid into the account, customers may only open
this account for the loyalty scheme and maintain minimum balances or, as
Nationwide found with its credit card, only use the card for cash withdrawals
abroad. For a current account to be profitable for a bank it is important for
it to become the primary customer account where the customers salary is paid into
and the mortgage and other core regular payments come out of it. Without high
current account balances or large overdraft fees (which the account does not
charge) current accounts for banks are loss leaders. For M&S they need to
demonstrably see the customers of their current accounts spend significantly
more in M&S stores and online than non-current account customers for the
bank to be deemed a success.

For those championing an end to so-called free banking, the launch in
September 2012 by M&S of fee-charging current accounts was seen as setting
an example to others that would help to accelerate the end of so-called free
banking. For those championing an end of free banking, this recent news from
M&S that they are launching fee-free accounts will be seen as a step
backwards delaying the end of free banking further.

So why have M&S made this announcement at this time? There are already
successful non-Big Four banks, particularly Nationwide, Metro Bank and
Santander (with their 1-2-3 account) as well as HSBC-owned First Direct who
have been taking advantage of the delays and the problems that other challenger
banks have been facing in getting their current account propositions right. Now
however with Tesco having announced that it will (finally) launch its current
account offering this summer and Virgin Money expected to launch its basic bank
account later this year, M&S is clearly keen to get to the potential
switchers ahead of the others.

But why have M&S decided to launch fee free products given the issues and
risks discussed above? It can only because of the need for volume. Running a
profitable current account business with all the investment in infrastructure
such as contact centres and IT, in personnel and marketing requires scale.
Clearly M&S, despite their protestations, haven’t achieved this with their
fee charging accounts and they see this as an opportunity to build a bigger
customer base which will reduce the marginal cost of running a bank.

It will only be some months after the launch of the both the new M&S
fee-free accounts and the Tesco current account that it will be clear whether
this move was good news for M&S’ beleaguered shareholders and customers or

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