Editor’s note: A version of this first appeared on Chris Skinner’s blog, The Finanser.
If you are not paying for something, then you are the product. This concept, which has been floating around for a while, is usually applied to companies like Facebook, Twitter and Google — businesses that are selling you, the users, to advertisers as clickbait.
In many countries, consumers bank for free. Yet, like tech, there is no such thing as free banking either. Not really. In cases where a bank waives fees, someone is paying for the service. Right now, it’s the poor who largely pay for banking services — the people who fall into an overdraft or need a quick loan to cover their everyday expenses. In fact, the poorer you are, the more you pay. Take a look at payday loan companies or money transmitters. If you are trying to send $100 from the U.S. to the Philippines, your family will not receive much of that $100 by the time all the fees and currency transfers are applied.
This “free” banking model, which is seriously flawed, is about to change — and not for the reasons some expect.
Many U.K. bankers will tell you that the free banking model is a broken idea. However, many of these bankers are under the impression that the only way the model will change will be if regulators tell the banks to change. After all, no bank wants to break ranks and say, “Hey, here is a bank account you have to pay for!” This pitch, after all, would not be a very attractive offer when competitors’ offerings are free. So banks assume they will all, as an industry, have to switch to chargeable bank accounts when their regulator says so.
But I disagree. Fintech companies are already breaking the free banking model on their own.
Recently, I blogged about how the big tech giants will target the low-hanging fruit of finance, namely payments and credit — an area where many fintech startups, such as TransferWise and Zopa, have also been making a mark. As more and more technology firms eat into narrow areas of banking, the banks will be left holding the expensive aspects of deposit accounts; however, the model will no longer be viable.
As a result, fintech companies will force retail banks to end free banking and rethink their whole business model. After all, if the margins and profitability — which have historically been based upon subsidization and cross-sales for increased share of wallet — disappear, the bank will have to do something drastic. If startups take the low-hanging fruit of payments transactions and credit interest for loans, where will banks make their future money? They will not make money just by running a deposit account or a savings account. In fact, fintech firms will force most banks not only to move away from free banking, but to work out what the customer wants and is willing to pay for. This pressure will make banks reimagine their retail banking business models, and ultimately, become information providers about wealth and money, and intermediators of application programming interfaces from thousands of fintech firms that provide transactional capabilities. In other words, it’s the end of free banking and the start of paid banking for services that are based on customers’ financial data and add value to their lives and the bank’s bottom line.
Ultimately, the end of free banking will be a good thing as it might make banking more equitable. If all of us know how much a payment, money transfer or 36-month loan costs, and we can compare apples with apples — which is not available today — then the financial system will have far more transparency. It’s called the democratization of finance and it’s happening whether we like it or not.