Free banking threatened by new global financial reality says International Monetary Fund (IMF)

Free banking services could become a thing of the past as falling demand for credit from consumers makes it less attractive for banks, according to the International Monetary Fund (IMF).

In a broad-ranging investigation of the effect of a global economic climate of low growth, low interest rates on financial services, the IMF said the changing nature of people’s relationships with banks would reduce the incentives to provide free services.

Retail banks currently use free services such as current accounts and payments in order to establish client relationships. The banks can then use these relationships to sell more lucrative services.

The IMF said: “Banking in advanced economies may evolve toward fee-based services.”

In a low interest rate environment “credit demand would likely be lower whereas household demand for transaction services would likely rise,” the IMF said.

Meanwhile an ageing population will require greater health insurance and less generous pension plans as people live longer, needing more healthcare over the course of their lives.

The IMF said: “Ageing will increase demand for health and long-term-care insurance, and low asset returns would accelerate the transition to defined-contribution private pension plans.”

Defined benefit plans pay out a fixed amount every year. However, they have become rarer as people have lived longer than pension funds expected with the rapid advances in the quality of healthcare.

Defined contribution plans, on the other hand, are usually significantly less generous, with the amount customers receive not guaranteed.