Overdraft Fees: The Pitfalls of 'Free'

The Supreme Court ruling on the OFT's jurisdiction over bank overdraft charges is going to do nothing for the banks' customer relationships.

Had the supreme court ruled in favour of the OFT and this lead to the banks having to repay overdraft fees, it would probably have meant the end of free banking for current accounts â€" an even less popular measure with banking customers.

Banks don't offer current acount services for our good, there is a profit motive involved. It's customers who incur overdraft fees that pay for the rest of us.

It appears to be a case of damned if you do, damned if you don't for banks, who have saddled themselves with a revenue model they can't easily move away from.

Once customers have got used to the idea that something is free, they don't like being made to pay for it -- ask Ruper Murdoch.

Although offering something for free to all customers and then offsetting the cost by penalising aberrant customer behaviour might be a good way to drive growth, ultimately you risk pleasing no one.

It's a problem suffered by other industries â€" the UK mobile phone sector enjoyed massive customer take up and high stock market valuations through subsidising handsets and services, offset by swingeing overseas calls and text charges. As more customers used their mobiles on holiday, opposition to these charges -- and hence customer dissatisfaction â€" grew.

Banks' customer relationships are sure to suffer whatever they do here. Perhaps the only positive aspect of today's verdict is that the issue has come to a head at a time when customer views of banks couldn't really get any worse.

There's a real case here for adopting a transparent approach to the way current account costs are recouped. If customers are aware that overdraft fees pay for everyone's current accounts, they might not feel so bad when they get stung.

Of course, it might just make many of them take more effort not to go overdrawn and let someone else pay for their service, reducing the amount of revenue the banks get over all.

(Pic: kalandrakas cc2.0)