The much-anticipated test case on bank account overdraft charges has finally kicked off, and I’m sitting squarely in the bank’s corner.
In case you missed it, the Office of Fair Trading bought forward the case after it emerged banks were charging customers up to £30 for every time they went overdrawn on their current accounts. If successful, the eight banks involved will have to refund affected customers to the tune of £5 billion.
Let me say right from the start that these fees are extortionately high - if they were not there would be no case - and the fact they fall heaviest on those least able to afford them is unfortunate. But, with the banks expected to levy monthly fees on every current account holder in the country if they lose - regardless of income or financial history, it’s a simple matter of choosing the lesser of two evils.
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Punishing the many because of the few?
It’s a difficult decision, as I do not want to side with the banks. The way some of them bullied or even terminated the accounts of customers who merely enquired about the bank charges shows their ruthless nature.
Furthermore, banks are partly responsible for creating this whole mess. They make 'unauthorised' overdrafts (with high fees) available - in part at least - because they want you to go over that limit and thus make them more money.
But there’s an old saying about leading a horse to water. Yes they created the whole unauthorised borrowing structure in the first place, but we all signed up to a contract when we opened the account, agreeing not to exceed a specified limit (be it accidental or not).
So if the banks decide to start charging all customers a fee if they are told to stop penalising those who break this agreement, isn’t this a case of punishing the many because of the actions of a few?
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Or is it the other way round?
Of course, you could argue that it is the people who aren’t very good at managing their finances – and thus incur the heavy overdraft fines – who are actually subsidising the cost of banking for all those who run their accounts well.
But there are loads of different fees that we all pay – stopping a cheque, transactions abroad, duplicate statements - so in effect we are all subsidising the cost of banking.
As an illustration of this: It is estimated that banks earn £3bn a year from overdraft charges, yet they achieved £38bn profit in 2006/07. So while the charges are an important part of their income, it’s by no means their bread and butter.
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If the OFT wins, you lose
My second reason for wanting the banks to win is that they’ll actually end up bleeding less money from us that way.
As I mentioned before, banks earn £3 billion a year from overdraft charges. But if they were to lose, they’d get their excuse to slap monthly charges on every current account.
According to a 2007 banking survey by Royal Bank of Scotland, there are roughly 41.2 million current account holders in the UK. Assuming the banks charged £10 per month on each, then they would be earning a massive £4.94 billion a year.
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Beat the banks at their own game
Monthly account fees can’t be avoided, but exceeding your overdraft can.
Whether it’s switching credit card debt to an interest free card, or reducing your energy bills, there are a host of ways to improve your finances and decrease the likelihood of going into the red.
If you absolutely cannot avoid exceeding your overdraft limit on occasion, minimise the impact by choosing a low overdraft current account.
Alliance & Leicester’s Premier Direct and Premier Current Account are probably the best for this, charging 5.9% and 7.9% interest on authorised and unauthorised overdrafts respectively. Do note that both charge a hefty £5 for every day you are over the unauthorised limit, so you’ll need to clear that debt as soon as possible.
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An argument for both sides
This whole overdraft charges issue is such a thorny one, but the bottom line is this: If the banks win, at the very least the media hype surrounding this case has created mass awareness of overdraft charges, meaning customers will all be aware of them (and know to avoid them at all costs).
Secondly, the banks are unlikely to view victory as them being given a free reign to bloat charges further still, as they’ve just suffered a PR nightmare and need to restore customers’ faith in them.
If they lose however, the overall cost to the consumer will likely be far higher.
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