Will low-interest rates kill free banking?

Free banking may become a thing of the past in the not-too-distant future if weak growth and ultra-low rates persist, the IMF warns.

In many countries around the world, among them the UK, customers are generally not charged for opening or holding money in a standard bank account.

Instead, banks make money by using their low-interest deposits to lend funds to other people in the form of mortgages and credit cards that attract a much higher interest charge.

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But with many loans tethered to the central bank's base interest rate, the "net interest margin" of banks – the difference between the rates paid out to deposit holders and charged to borrowers that is akin to their profit margin – has declined.

This is why British banks are reporting a squeeze on their underlying profits. The Bank of England's base rate is currently at an all-time low of 0.25 per cent.

Low rates are not the only problem. Growth rates are also low and yields on safe haven assets like government bonds, which are a key determinant for pension fund returns, are depressed.

To boot, "demographic change was likely to reduce demand for credit from households and businesses but increase the need for easy-access accounts, payments services and products such as health insurance," says the Daily Telegraph.

The net result of this is that banks will "evolve towards provision of fee-based and utility services" like life insurance, the IMF says.

For consumers, the result will be that more banks will probably charge just for depositing money. There could also be more competition for other financial services products.

Other changes in the market – if the low-rates-low-growth environment continues – could mean that smaller challenger banks are subsumed by their larger peers, the IMF says.