Chris Skinner outlines the democratisation of finance, and how fintech is changing the free banking model.

This quote – If you’re getting something for free, you are the product – has been floating around for a while, and normally is related to Facebook and Google. It’s all about the fact that these companies are selling you to advertisers as clickbait. Facebook, Google, Twitter and others are not free at all. You just think they are because you are the product. But what about banking?

We all bank for free, or in many countries we do, yet there’s no such thing as free banking. Someone’s paying. Right now, it’s the poor who pay: those people who fall into an overdraft or need loans and credit. In fact, the poorer you are the more you pay. Take a look at payday loan companies or money transmitters. If you’re trying to send $100 from the US to the Philippines, your family won’t see much of that $100 by the time all the fees and currency transfers are applied. But this is all about to change.

I’ve been saying for a while that the whole idea of free banking is flawed, and the industry agrees. Many UK bankers will tell you it’s a broken idea, but that the only way it will change will be if the regulator tells the banks to change. After all, no bank wants to break ranks and say hey, here’s a bank account you have to pay for! It’s not a very attractive offer when all the competition is free. So they think they will all have to change to chargeable bank accounts as a whole, and that the system will never change unless the regulator says so. I disagree, because fintech is changing the free banking model.

As I blogged last week, the big tech giants will be targeting the low-hanging fruit of finance, namely payments and credit. This is also where many fintech startups have been making their mark, such as TransferWise and Zopa. As more and more technology firms eat into narrow areas of banking, banks will be left holding the expensive aspects of deposit accounts, which will no longer be viable. As a result, technology will force retail banks to end free banking.

I think this will be a good thing, as it might make banking more equitable. If all of us know how much a payment costs, or a money transfer, or a 36-month loan, and we can compare apples with apples (right now, most banks have lemons and oranges), then we will have far more transparency in the system. It’s called the democratisation of finance and it’s happening whether we like it or not.

So, the fallacy of free banking will disappear.

READ NEXT: Fintech must lead the way to free finance

– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Image by dcwcreations,

About the author

Chris Skinner

Chris Skinner is an independent commentator on the financial markets through the Finanser, and chair of the European networking forum the Financial Services Club, which he founded in 2004. He is an author of numerous books covering everything from European regulations in banking through to the credit crisis, to the future of banking.

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