For many years, the UK general public has experienced some of the most flexible, competitive and cheapest banking facilities in the world. With the demise of the financial system through late 2007 and 2008, the banks are now under severe pressure to change the way that they have operated in the past. Gone is the expectation that property prices will increase year on year and help fuel the borrowing and spending cycle that has grown with it.
Far be it from anyone to defend what the banks have allowed to happen as they strive to grow and increase shareholder value faster than their competitors. However, the UK is heavily dependent on the financial services sector and we will all be a part of restoring them to viable and profitable businesses. In order for that to happen, a number of changes in the way that they operate have already come to the fore.
Much of the damage done in the global economy was by the investment banking divisions and their development and marketing of esoteric derivatives. These types of activities are sure to be more highly regulated going forward and, most likely, be separated off from more traditional retail banking type activities. Whilst these do not affect the man in the street directly, they did produce the high level returns that fuelled the relative success of the banks. Unfortunately, the wheels fell off.
It is in the retail sector of banking that the average consumer will feel the main thrust of any changes. Some banks have already withdrawn or severely limited the availability of free current accounts. Now there is a requirement to keep at least a minimum balance or to have a regular amount deposited each month to qualify. Even with that, any deposit interest rates are minimal or zero.
So what next? Well, if the Continent and North American markets are followed then we can expect to be paying a lot more for our financial services. Annual fees are already common on credit cards and there is a possibility that an annual account fee could be charged on normal clearing accounts. Fees could also be charged on cheques cashed or paid into the account and for receiving paper statements. In fact, be prepared for a steady increase in fees of all sorts as the banks slowly gear up to making profits in a low interest environment. The banks already have the wherewithal to implement these charges. Business customers have, for years, been subjected to a whole range of fees to manage their accounts including arrangement fees for overdrafts, facility fees for making working capital lines available and transaction fees on debits and credits. Whilst on-line banking removes a lot of the manual work for the banks, fees here will also be slowly introduced.
Of course banks like to lend money too. Many of the deals that have been available in the past few years are now likely to be more rarefied. Margins, or spreads, on all forms of borrowings will increase be it the overdraft or a term loan. And they will be seeking out only the best possible credits too since few have room to make mistakes and write off even more bad debt.
Although there has been a shakeout, it will lead to fitter and more competitive banks and lending institutions. They will target their offers more specifically in the past and will be expected to act more responsibly in respect of lendings than ever before. So be prepared to evidence your earnings and work hard to keep your credit history clear.
With reduced capacity to lend due to the weakness of the balance sheets and the fewer number in the market place, credit will be harder to find. Therefore, we should not expect automatic credit or mortgage acceptance. Terms will be stricter and rates higher. Fees will become more common place than before but if you have money, then you should find it easier to be much in demand.
It is vital that we have a well capitalised, profitable and competitive banking sector. For that to happen, we will all, sadly, have to pay for the collective failings of the past. Those that emerge the most unscathed will probably offer the most competitive banking facilities. New entrants may make it difficult for the older, established banks to implement the charges that they plan. With more global regulation likely to protect depositors' funds, foreign banks may take up some of the gap left by those that have departed. For all our sakes, let's hope that the lean, fit and competitive banking sector gets its act together soon. To do that, we must all lower our expectations and be prepared to pay a little more for the services we enjoy.