Would you pay £99 to open a bank account?

According to the Financial Inclusion Centre, a basic bank account is a requirement for people to participate fairly and fully in a market-based society, to generate and receive income, save for the future, and purchase services and products*.

Most UK citizens will encounter no difficulty in opening an account themselves in a high street bank or post office, and although some institutions may charge maintenance fees for premier accounts, currently no high street bank charges customers to open a bank account.

However, it has come to the attention of Credit Action that there are many individuals who are paying to have bank accounts opened for them by bank intermediaries, in many cases paying up to £99 to open a bank account.

Would you pay £99 to open up a bank account, something you can reasonably undertake yourself for free? I’m guessing not.

However, maybe you’re a busy professional who has little time to call into your local branch with some identification and fill in some forms. Indeed in these cases you may be glad to avail of a bank intermediary and happy to pay a fee to have them arrange a bank account for you.

Possibly you find it difficult in physically accessing banks or you find financial institutions very intimidating. Maybe you have tried to open a bank account previously and have been denied. Indeed due to a variety of reasons, including a bad credit history or inadequate documentation, individuals may face difficulties in opening bank accounts with high street banks.

Again in these situations you may choose to pay a fee and avail of an intermediary who can try to open a bank account for you.

However there is another situation whereby you may pay to open a bank account.

Today in the UK there are 2.71 million citizens who do not possess a transactional bank account according to HM Treasury**. Against this backdrop of financial exclusion and low financial capability many individuals, who are often those least able to afford it, become desperate and can end up paying to access financial products that are available for free.

As individuals and consumers we all endowed with the ability and choice to make decisions about how we spend our money and where. Yet some of us will possess a greater understanding of the products and services we are purchasing and will shop around to get the best price before parting with our money.

Yet those new to the financial services industry may simply not be aware of the various avenues available to them when engaging with the sector.

For example, a study commissioned by the Money Advice Trust into the debt management plan (DMP) industry showed how most clients of fee-charging debt management companies had very little awareness that free-to-client services existed – and how nearly all would not have paid for this service had they been aware that free-to-client DMP providers existed***.

The same issue arises in the debt and money advice sector where many end up paying for financial advice when there is a plethora of free and independent debt advice organisations to assist people with their personal finances.

Indeed for those who may have difficulty in approaching banking institutions there are many charitable bodies, consumer support bodies, and government institutions that can assist individuals overcome their financial exclusion. For example Toynbee Hall, a social reform organisation based in the East of London, has helped thousands of individuals open bank accounts free of charge.

There are other situations whereby consumers may be drawn into paying for financial services and products despite been able to obtain them for free.

The most common argument heard is from those who suggest that free-to-client service providers will not provide the same level of quality as their commercial counterparts due to fewer resources. However there is no evidence to suggest that paying top dollar will get you a better service or product, or conversely, that free-to-client services will get you a worse service or product.

The fact is that in most cases free-to-client service providers operate to at least the same quality level as commercial service providers (confirmed by the awarding of quality standards by regulatory authorities for example) and often with the added bonus of impartial or independent advice (due to the lack of a vested interest in the consumer’s final decision).

On the other hand advertising through media such as newspapers, internet, and television is a powerful tool employed by commercial service providers to encourage people to use their services. Certain bank intermediaries advertise by claiming that they can ‘guarantee’ to get you a bank account – sounds good if you have been having difficulty opening bank accounts in the past.

Yet due to their status as bank intermediaries, and not banking institutions, these companies are in no position to guarantee acceptance for bank accounts as they do not provide such financial products. If the ‘guarantee’ relates to the company’s acceptance of a client’s application rather than the banks, then this is not clear. Furthermore, whether in 99.9% of cases they succeed in obtaining a bank account, or return fees to unsuccessful clients, it does not negate the misleading nature of these advertisements in the first place. Indeed they create a false impression, even if everything stated in it may be literally true****.

In light of the fact that all it takes for financially excluded individuals to open an ordinary basic bank account is proof of address/utility statement and identification, it would make more sense for individuals to open an account in a bank with a customer representative or with the assistance of a charitable body, instead of paying fees to bank intermediaries.

Credit Action fully comprehends and appreciates that many individuals can make a decision to pay for the opening of a bank account and that bank intermediaries are entitled to charge for this service. Yet for those who can least afford to do so this is a regrettable situation.

In any case, since bank accounts have increasingly become a necessity in our lives, yet are widely available and free-of-charge to open, we believe that companies could do better than to charge individuals for these basic products, particularly if these individuals have low levels of understanding of the financial services sector.

Regulation is no answer to this conundrum, as there is nothing illegal undertaken by bank intermediaries in arranging bank accounts.

Therefore there is an onus on banks to make their services as accessible as possible, and to ensure that staff are well trained in dealing with customers who have little understanding of financial services and products.

Also vital is the improvement of the financial education and capability of individuals throughout the UK. This will help consumers to avoid paying unnecessary costs, and allow them to make informed decisions before they choose to pay for widely available and free-of-charge financial products such as bank accounts.

* The Financial Inclusion Centre, The Challenge. Accessed January 28, 2010 at http://www.inclusioncentre.org.uk/3.html

**http://www.hm-treasury.gov.uk/financial_inclusion_bankaccounts.htm

*** An independent review of the fee-charging debt management industry, Sharon Collard, Personal Finance Research Centre, University of Bristol and the Money Advice Trust, June 2009, p43,65.

**** OFT Misleading Advertisements factsheet