The Long Con

21 October 2015


Mark Mullen
Mark Mullen

The long con

There’s no such thing as a free lunch. Or current account

This morning, bankers up and down the country will have read the Competition and Markets Authority’s (CMA) draft findings on current account competition. Doubtless some were relieved and others disappointed. I haven’t quite made up my mind one way or another yet.

The report contains some very welcome proposals. If all were implemented customers would doubtless find themselves in a better position when it comes to determining which current account is best for them. But I can’t help but feel that an opportunity has been missed.

Since 2014 it has been illegal to sell alcohol at a loss, although more generally selling loss leaders is not illegal. It’s a technique used to attract consumers in the hope of selling them something more expensive. It’s used to introduce products by encouraging customers to try something new. More controversially, it’s also used by dominant brands to protect market share by pricing competitors out of the picture.

It’s easy to see why the government wants to regulate the sale of alcohol. Even the most liberal can see the damage it causes – quite simply when taken in excess, it’s bad for your health. Beyond preventing loss leadership on alcohol, the government also imposes high levels of duty linked to strength – the stronger the alcohol, the higher the duty. If you buy a pint of 5.0% strength lager, the Beer Duty you pay is 18.37p x 5.0 = 91.85p per litre. This works out at just over 52p a pint (about 568ml or 0.568 litres).

Are current accounts bad for your health? Hell yes! Get the wrong one and it can end up costing you a fortune in penalties, lost earnings and general hassle. And banks don’t just give them away for free; (if in credit) they actively pay customers to take them. They loss lead. But bankers are not unintelligent, so they loss lead for exactly the same reasons as retailers (to attract new customers and up-sell them to a more expensive product, to encourage customers to try something new and, of course, to protect their market share by pricing competitors out of the picture!).

Yes, to protect their market share by pricing competitors out of the picture. It used to be that owning hundreds of branches was the main way that big banks created barriers to new entrants but the digital and smartphone revolutions have put an end to that. Now they are using loss leadership to achieve the same thing. In the end there is no such thing as a free lunch, so customers are paying for this loss; trouble is they don’t know how.

It’s the long con and it’s got to stop.