- Transaction Accounts replace current accounts
- What is still the same
- What is different
- Benefits of the changes
- Cost of these changes - Account Fees
As a customer of a bank, your current account will be replaced by a Transaction Account. Your debit/ATM card, cheque book, and internet banking will all work as normal. The only difference will be:
- The bank won't be able to use the money in your account for its own investments
- There would probably be a small fee (≈$5/month) for using the account. This 'Transaction Account' system means that if the bank goes bust, the money in your account is 100% safe and can be quickly transferred to another bank.
Transaction Accounts replace current accounts
Present-day 'current' accounts, are generally used for payment services (cheques, debit cards, cash machines, electronic fund transfers), and receiving money (such as a monthly salary).
These current accounts will be replaced by 'Transaction Accounts'. To the customer, a transaction account will appear to be almost exactly the same as a present-day current account, and members of the public will probably continue to call them 'current' accounts.
However, to differentiate between the pre- and post-reform situations, we'll be using the technical term Transaction Accounts.
What is still the same
- Transaction Accounts will still provide cheques, debit cards, access to cash machines, electronic fund transfers etc.
- Salaries will still be paid into Transaction Accounts.
- Payments between individuals and businesses will still be made from one Transaction Account to another.
- Customers will still have instant access to money in the Transaction Accounts.
- These accounts may still offer overdrafts. (The provision of overdrafts is a key, but complex part of the modernised system, which is dealt with here: Overdrafts & General Liquidity in the Modernised System.)
What is different
- A bank will no longer be able to use the money in Transaction Accounts for making loans or funding its own investments.
- These accounts will all be held 'off the balance sheet', and not be considered part of the liabilities of the bank.
- The money paid into Transaction Accounts will be held in full within an account at the Reserve Bank. In other words, the money is 'in the bank' at all times, and could be repaid in full (to all customers) at any time, without having any impact on the bank's overall financial health. It is technically impossible for the money to be lost, and a bankrupt bank would still be able to repay all its Transaction Account holders.
- Because the banks are unable to use the funds placed in these accounts to invest or lend, they will be unable to earn a return on these funds. As they will still incur the costs of providing payment services (cheque books, ATM cards, cash handling etc), they will almost certainly need to implement account charges to cover these costs.
Benefits of the changes
- The government and taxpayer would have absolutely no exposure to problems with individual banks.
- It would now be impossible to suffer a 'run on the bank'. Even if all Transaction Account customers of one bank were to withdraw their money on a single day, the bank would be able to pay with no impact on its financial health and no need for emergency assistance from the government.
- Money placed into a Transaction Account would be 100% safe. There would be no ceiling limit on the amount that is safe, and the 'guarantee' has no real or potential cost for the taxpayer (because the money can not be lost).
- Because of the way the clearing system under this modernised system would work (see ‘The Payments System’), the time for payments to show up in the recipient's account could be as little as 30 seconds (as compared to 2 hours to 4 days as at the moment). This would provide a better service to both individuals and companies and would make the economy more efficient.
- If a bank collapsed, it would only be an administrative procedure to move the Transaction Accounts over to other banks, and no money would ever be at risk.
Cost of these changes - Account Fees
As mentioned above, because the banks can not use these funds any more to make loans, they will want to recoup the costs of providing payment services through charging account fees.
While no-one likes to start paying for something that was previously free (although it should be noted that many banks are already introducing fees on current accounts), the fee that banks charge would be more than outweighed by the very considerable savings that the average working adult could expect to make as a result of the modernised system (these savings are discussed later).
Note that even today, these costs are incurred by the bank, and recouped from customers via unauthorised overdraft charges and other unexpected fees.
In the current system, many accounts pay no interest at all.
In addition, the post-reform payments system may be significantly cheaper to run than the present-day clearing system, as there would be no need for a complex ‘clearing’ system (transactions would be instant and final). This means that the only significant costs would be in creating the physical ATM cards and cheque books, offering customer service, and maintaining the banks' main computer systems.
In practice, there will be significant market pressure to keep account fees as low as possible.
As the next chapter shows, to be able to make loans, post-reform banks will need to attract customers who wish to make investments with them.
One way to attract customers and gain market share is to run a 'loss-leader' campaign with their Transaction Accounts. They would do this for the same reason that they currently offer free overdrafts to students - someone who banks with you for normal payment services is far more likely than the average consumer to save with you and come to you first for overdrafts, credit cards and mortgages.
As a result, competition between banks for market share means that the costs of payment services may be ‘absorbed’ by the banks as a cost of acquiring market share, and recouped from their investment earnings. In short, the cost passed on to customers is likely to be minimal.