The role of implicit costs and product quality in determining the customer costs of using personal current accounts

This study examines the influence of offering an overdraft facility on the customer costs of using a personal current account (also termed checking accounts). This assessment informs the wider debate as to whether overdraft use is a significant factor in paying for current account use within ‘free banking’ systems. A UK data set of 222 current accounts, recorded monthly between 1995 and 2011 is used in combination with interest rates from 1,200 instant access deposit accounts offered contemporaneously by the same firms. We use a panel framework to undertake the econometric analysis encapsulating contemporaneous correlation amongst UK current accounts. Our results do not support predictions that cross-subsidies flow from overdraft users to other current account customers. Both the quality of current accounts and the implicit costs of current account use arising from low current account deposit interest rates are significant features of pricing within this market and influential in the determination of customer costs. It is proposed that future policy work needs to acknowledge the significant role of product quality and depositor inattention in the customer costs of current account use, as much as concerns with overdraft use.