Debate 3

At our third debate Paul Johnson, former Chief Micro Economist at the Treasury, will present a paper considering whether “free” financial products are good for consumers.

The cross-subsidy business model — the shifting of costs from one product to another - occurs in a wide variety of markets. For example, a free or discounted handset is often included when a customer commits to a mobile phone contract and printer manufacturers discount printers hoping to generate a revenue stream from the repeat purchase of consumable inks. Equally, in a competitive marketplace financial firms have chosen to provide some services ‘free of charge’ to consumers, such as current accounts, money withdrawal from ATMs, credit cards and independent advice paid for by commissions paid by providers. These services have an underlying cost which firms must absorb or recover from elsewhere.

Arguably, in the financial services sector the cross-subsidy model has contributed to serious problems that have led to consumer distrust. For example, IFAs rely on commission paid by the product provider, not a fee paid by the client, which creates the risk of mis-selling. In the case of current accounts, the banks have chosen to recover costs partly by charging penalty fees; the OFT has deemed these fees as excessive and mounted a legal challenge. The banks have said that the OFT’s litigation, if ultimately successful, could signal the end of free banking.

This seminar will be an opportunity to consider the wider issues in more detail, such as would the end of free banking actually be a bad thing? What are the potential consumer benefits of paying for these services? And should consumers simply learn to accept that there is no such thing as a free lunch?

Download Paul Johnson’s paper.

Download a summary of the third discussion event.

Download the podcast from the third debate (8.7MB mp3).

Paul Johnson is the Treasury’s former Chief Micro Economist and deputy head of the Government Economic Service. He is one of Britain’s leading economists and has written extensively on pensions, welfare, tax and inequality.