Page last updated at 08:52 GMT, Friday, 28 March 2008

Will the penny drop along with free banking?

By Kevin Peachey
Personal finance and consumer affairs reporter, BBC News

Early cashpoint machine
A customer uses one of the first cashpoint machines in 1967

With banks tightening their belts as a result of the credit crunch, every customer can expect to feel the squeeze too.

The end of so-called "free banking" is likely to accelerate, but what other changes might the ordinary customer expect from their high-street bank?

Some services, such as cheque guarantee cards and paper statements, could come under the microscope.

Could the future of 1p and 2p pieces even be at risk?

Rip-off Britain?

Decisions made in the near future are likely to have an effect on our personal banking for some years to come.

First, some context.

Retail banking for the UK consumer remains cheaper than in much of Europe, even though banks face a challenge of poor public perception because of high profits.

Payments in numbers
108m - face value of 1p pieces in circulation in the UK in March 2007
Four billion - peak of UK cheque payments in 1990
1.8 billion - transactions by cheque in 2006
One in five - adults make all their day-to-day purchases in cash
Two thirds - of all personal bills will be paid by direct debit in 2016

Source: Royal Mint and Payments Council

This, according to banking analysts, is why the days of so-called free banking are numbered.

"Free banking is a thing of the past," says Mark Durling, of Brewin Dolphin Securities.

"If we want the traditional personal banking, there will be a fee."

But Lee Goodwin, of Fox Pitt Kelton, says banks would not want to be too blatant in ending free banking.

Such a move might involve charging an annual or monthly fee for new current account holders, but Mr Goodwin says banks are more likely to try to discourage more expensive forms of transaction.

So, in a similar way to utility companies encouraging the use of direct debit to pay bills, banks might push customers towards internet banking rather than using their local branch, electronic rather than paper statements, or making deposits at ATM machines rather than over the counter.

The British Bankers' Association, the mouthpiece for UK banks, says that when customers pay a fee for an account, they are guaranteed to receive something extra such as travel insurance.

Ways to pay

The High Court test case on overdraft charges has shown that the Office of Fair Trading wants banks to be transparent about their charges.

It also regards cross-subsidisation - charging high fees to those going overdrawn to keep the cost of ordinary current accounts down - as unfair.

Another way banks already "hide" charges is by offering poor rates of interest on current accounts.

Changing the way we pay for things can cut costs for banks, such as the transport costs of cash, handling cheques and insurance costs to cover fraud.

Vanishing cheques

Coins
The future of coppers is a political decision

The most striking change has been the decline of paper-based payments, such as cheques.

The UK Payments Council will publish a wide-ranging report in the spring about how we will pay for things in the future. It predicts that by 2016 only one payment in 50 (840 million transactions) will be made by cheque.

That could spell the end for standalone cheque guarantee cards - of which there are around 1.8 million left.

The Cheque Card Management Committee, which administers the scheme, has suggested an "orderly and planned withdrawal" of the scheme which was established in 1969.

The Payments Council consulted on the possibility of the cheque clearing system, and therefore all cheques, disappearing in 2018.

New technology such as contactless cards will be developed, when customers simply hold the card close to a sensor on the till, like an Oyster card used on London's transport system.

That, according to the Payments Council, will accelerate the decline in the use of cash. It forecasts that in 2013 more non-cash payments - mainly by debit and credit card - will be made than cash transactions for the first time.

Watch the pennies

A study by the European Central Bank found that cash deposits and withdrawals accounted for a greater proportion of direct processing and transaction costs for banks than any other payment method.

The 1p coin is so iconic that they will find it difficult to think of getting rid of it
Banking analyst Lee Goodwin

The Payments Council says cash will continue to play a major part in daily life.

But what about all those copper coins that ruin our pockets and are losing their worth over time owing to inflation? Could 1p and 2p pieces go the same way as the half penny piece?

It costs banks to order them, to count them and to haul them around. There were an estimated 108m-worth of 1p pieces in circulation in the UK at the end of March 2007, according to the Royal Mint.

Sandra Quinn, of UK payments association Apacs, says there could be an efficiency, if not a cultural, argument made to stop distributing them.

The British Bankers' Association says the banks will continue to provide the coins that people want.

Finland and the Netherlands only mint one cent and two cent Euro coins for collectors and Australia and New Zealand got rid of their two lowest denomination coins in the early 1990s.

"The 1p coin is so iconic that they will find it difficult to think of getting rid of it, even if everybody would prefer it if we did," says Mr Goodwin.

He says a more likely event, welcomed by the banking industry and small retailers, would be the replacement of 5 notes with more durable 5 coins.

Maybe it is time to sew an extra lining into those pockets.


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