Banks are now trying desperately to spin the story about excessive and illegal bank charges, but I expect the Office of Fair Trading to slap them down next month when it rules on this issue.
Between them Britain’s banks make annual profits of some £20 billion. They are among the most profitable banks in the world. Yet bank chiefs are now lining up to argue that they need to introduce monthly fees on current accounts (the new boss at Nationwide says this would be fairer) and financial researchers defaqto have concluded that the end of free banking is at hand.
Spurred on by the latest announcements of huge banking profits, over a million people have downloaded documents to help them reclaim excessive bank charges from websites including
Which?Shop around for a current account with our best buysThe consumer revolution is growing in sizeHundreds of thousands of people have had refunds of penalty charges and no bank has yet turned up in court to defend these charges, with the result that Small Claims Courts routinely award refunds to claimants by default and the banks pay up. The OFT is expected to rule that penalty charges must reflect the actual costs incurred by banks, which would cut the banks’ profits from current account customers.
The
Financial Ombudsman Service, which handles complaints against financial institutions which haven’t been resolved through a company’s internal procedures, is being swamped by new complaints about banks.
Among the latest complaints are that when a customer complains about charges, the bank closes their account - something the FoS has said is simply unacceptable, and could well lead to banks being fined by the Financial Services Authority for breaching its ‘Treat Customers Fairly’ rules.
Yet rather than accept that under well-established principle of English law penalty bank charges are illegal, banks are fighting rearguard actions and claiming that if they can’t levy these charges then everyone will have to pay for their current accounts.
See our current account best buys here.Tell us what it really costsThe banks are right to say that operating a current account costs them money. But what they don’t do is go on to say how much money and for what - an issue I hope the Office of Fair Trading will delve into in depth. I believe that apart from running cash machine networks, the banks’ biggest costs of operating accounts are the branches and the cheque clearing system.
So the cost of operating an account without a chequebook offered by a branchless bank is probably a fraction of the cost of a traditional High Street account. I would expect branchless banks (or banking newcomers like supermarkets) to offer simple internet/cash machine bank accounts free as loss leaders exactly as other businesses offer free entry-level products to get customers on board.
A leading stockbroker has estimated that of the £6,500 million a year banks earn from current accounts, only £1,200 million comes from overdraft fees, so in fact the banks are on shaky ground in trying to claim that loss of these fees would make a huge difference to their profitability.
Shop around for a current account with our best buys.Spin for more banking profitsSo the banks’ attempts to switch the story from one about businesses which have ridden roughshod over their customers, ignored consumer law and are about to be pilloried by the Office of Fair Trading to a scare story about the end of free banking is another classic case of banking spin.
Some commentators have been taken in by financial researcher defaqto’s prediction that free banking will end within two years. I note that defaqto earns most of its money providing research to financial institutions and that predicting the end of free current accounts will do its commercial relationships with the banks no harm at all.
In a free market, businesses will charge what they can get away with. All the high street banks have persuaded some of their customers to pay monthly fees of £10-20 for accounts with extra features. Citibank is the latest to try this wheeze, having told 150,000 customers of its Sterling Current Account that from May they will pay £10 a month for a package of benefits Citibank says is worth £450 a year. I’m sure for most of its customers the real value of the benefits will be far lower than that and in many cases will be less than the fee they pay.
See our current account best buys hereBanks don’t listen to complaints!One reader, Mr JA, was so incensed at Citibank’s pressure-selling tactics that he went to a branch and complained - to no effect, of course. JA had previously been happy with his Citibank account, but had had a similar experience when Marks & Sparks had tried to railroad its customers from a store account to a credit card account a few years back.He reminds me that unusually, M&S had the good grace to respond to a wave of complaints by abandoning this highly unpopular plan, so it kept its customers.
Citibank will not keep JA’s custom, because as he has already noted, Citibank’s free account is intended to have less features than the new £10-a-month job, so having been used to a VW Golf he will now find himself driving an Astra and will be looking for a better model elsewhere.
Citibank has just bought Egg from the Prudential, so I think a lot more of its customers will soon be on the receiving end of higher charges and lower benefits. But we can’t just blame the banks. Many of us are lazy. For years I’ve paid a monthly fee for a current account that gives me free travel insurance, mobile phone insurance and AA membership, even though I know it’s poor value. Banks know that we would much rather spend our time shopping for fun things than for boring financial products, so they take advantage of us.
See our current account best buys here.Which bits of banking do you really need?So the answer is: get smart. Work out which bits of current account banking you really do need. It could be a lot less than you think. I can almost do without a chequebook and in fact I could definitely do without it if I could be bothered to get people’s account details, in which case I could easily pay them online.
I can certainly do without branches and all those packaged benefits. In theory I could even get by without an overdraft, because I have an offset mortgage from my bank where the maximum loan is well in excess of my actual mortgage borrowing. (So really it’s an overdraft secured against my house, but I don’t need to pay arrangement fees and all the rest of that nonsense).
Look at it like this and you realise that the banks have to con us into believing we need all that old-fashioned stuff like branches and cheques and direct debits in order to justify charging us for our current accounts. If direct debits hadn’t been invented long ago in the pre-internet age, would anyone seriously propose creating them today?
Why would anyone in their right minds give a business the power to take undetermined amounts of money from their account, with all the administration and policing required to make it work? Are banks trying to get us to pay for having dire
