7.9 Current accounts are priced in a way which recovers total costs but does not reflect the underlying costs of any one account. There are significant fixed costs in providing a current account, as well as transaction costs. Face to face transactions are more costly to provide than their internet or telephone equivalents so banks usually lose money on them overall. To give an idea of actual costs,
ATM withdrawals cost up to 30 pence, automated credit transfers about 10 pence and cashback transactions about 15 pence. Paying in cheques, by whatever method, costs on average 45 pence. Using a branch counter for transactions costs about £1. In round terms, the incremental set up cost of a current account is about £25. Incremental fixed maintenance costs, including quarterly paper statements, add around £10 a year.
7.10 Banks make money by using the positive balances held in current accounts, on which little or no
interest
is paid. Accounts in credit in the UK in 1998 had an average positive balance of £1,175, each generating up to £75 income for the suppliers. Banks also charge interest and fees on overdrafts. This implies that, overall, the provision of current accounts is a profitable activity. However, there is significant cross subsidy between different types of customer. The banks do not seem to have the data needed to quantify the degree of cross subsidy, but the direction is clear. The beneficiaries are customers who maintain low positive balances and make heavy use of high cost transactions for which they are not charged. The losers are customers with high positive balances who make few face to face transactions. Because prices are set nationally, there is also likely to be a cross subsidy between geographical locations with different cost bases. Busy urban branches are likely to subsidise small rural ones, for instance.
Cost of transactions
). Note this is a report from March 2000. The entire report can be accessed here.
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