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Nic Cicutti: Banks should scrap free services

Competition on overdraft charges alone will not do the trick. Banks should charge us for each service

Has anyone ever queried how much it actually costs to run a bank account? I asked myself that question a few weeks ago, after receiving an annual letter from my bank detailing how much I had paid that year in charges on three accounts I have with it.

The sum total was about £22; not a lot considering that, in the past 12 months, I have made upwards of 20 calls setting up, changing or deleting payments to various individuals and service providers, or just querying various items on my monthly statements.

That is not counting the cost of my bank sending me the statements themselves, managing a score of standing orders and direct debits, and all other banking activities most of us have to deal with day today.

Just before Christmas, the FCA announced that fixed daily and monthly overdraft fees would be banned as part of a package of reforms it is proposing. It said the way overdraft charges are set out should be by means of a simple annual percentage rate, to help consumers compare them against each other.

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I have mixed feelings about the FCA’s proposals. On the one hand, the current system of overdraft charges is a complex mess, in which it is virtually impossible to calculate what each bank levies.

I am absolutely certain that this is a deliberate attempt by the banks to rig the system in their favour by bamboozling their account holders.

In that sense, the FCA’s attempt to use APRs as a comparison tool is welcome, even though I suspect the vast majority of people do not quite understand how an APR actually works. Still, as long as they can figure out that the higher an APR is, the more it costs to be overdrawn, that is a useful start.

The big question is that of what people can do about it. Most of us do not set out to be overdrawn. When we open a new bank account, overdraft charges are rarely at the top of the list of issues we think of as crucial. Even for students, while the question of an interest-free overdraft does matter in the here and now, few believe it will matter to them 10 or 20 years hence.

The problem is that, as we know, banks are earning a whopping £2.4bn in overdraft charges.

Crucially, according to the FCA’s research, more than 50 per cent of banks’ unarranged overdraft fees came from just 1.5 per cent of customers in 2016 and people living in deprived areas of the country are the worst affected.

For every £1 lent out through unarranged overdrafts, banks make £2.50. Those who pay these charges are low earners or those in severe financial difficulties. When I worked on a daily newspaper, we received anything up to 20 letters a week from people trapped in a hamster wheel of expensive overdraft charges as they had temporarily gone overdrawn without authorisation a few months previously.

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In some cases, they were paying upwards of £90 a month in charges because they were perpetually several hundred pounds overdrawn. The ongoing charges they were paying made it virtually impossible for them to exit the trap they found themselves in. Until I started earning a decent income, I was in a similar position; some months up to 10 per cent of my salary went on charges.

Since then, what has struck me is that it is the less well-off and the less financially astute who end up contributing towards the billions of pounds needed to ensure the rest of the population are able to access their web and telephone-based accounts for nothing.

The banks rely on a cross-subsidy from the poorest in society in order to offer the rest of us free banking.

In that sense, expecting people simply to switch accounts because Bank A’s overdraft APR is a couple of percentage points higher than that of Bank B misses the point. Competition over bank overdraft charges alone will not do the trick.

Which is why I have long been in favour of banks charging all of us for each of the banking services they provide. If there was a fair charge for agreed overdrafts and a higher – but still fair – charge for unauthorised overdrafts in consideration of the risks inherent in the latter, the banks would still earn a reasonable amount of money. It needn’t cost a huge amount.

That might leave the vast bulk of customers to pay a couple of quid or so each month for all other banking services they currently receive for nothing. Even as I raise the idea, I can imagine how it will go down with the majority of Money Marketing readers who probably run their bank accounts in a responsible manner and would rail against the idea of coughing up for something they never needed to pay for before.

Yet we need to face up to some unpalatable facts. One of them is that “free banking” is a myth.

The current system, where the poor subsidise the better-off, allowing banks to hide the true cost of operating a current account, perpetuates that myth. It is time to end the sorry mess.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. Many years ago a colleague suggested that at some point ‘free banking’ would have to end. It’s highly unlikely that any one of the big banks would dare change now. They’d all have to change & I’m sure the competitions board would cry foul if they all made announcements at the same time.
    They want us to swop to fee paying accounts with ‘free features’ that require us to spend more money to actually benefit! ‘Free’ Travel insurance; discounts on this, that & the other.
    Most of my banking is on-line or through the app on my phone so I wouldn’t expect to be charged for self-service but the banks have had to develop these facilities and they certainly are not cheap.
    Absolutely agree that the current situation is very unfair but there really are no easy answers.

  2. I have never paid bank charges when in credit and I have been constantly in credit for over 35 years.

    I have several bank accounts. My bill paying account is with a bank that I have been with since my first grant cheque at uni. No charges there – why should there be? They use my money for free as they don’t pay interest.

    The other banks are used for savings as they pay interest. But bearing in mind I’m lucky to get 1.5% and they lend out at upwards of 4% – again why should I pay charges?

    Where the banks really make a killing is on the feckless who can’t manage their money, and insist on spending what the don’t have. Credit card interest is around 15% – a pretty juicy rate of return.

    There will always be banks that won’t charge for those in credit, so I wonder if any will risk charging their credit customers. Of course there are always stupid people who have plenty in credit, but pay charges, just because they want a fancy cheque book or have a flunky in morning coat at the bank.

    99% of my activity with banks is on the internet. I very rarely call them. However I do insist on them sending me statements as for money laundering purposes no one will yet accept a bank statement printout from the website.

  3. Nicholas Pleasure 15th January 2019 at 3:47 pm

    I think we may be missing the point. The reason why this will happen is that the first bank that introduces charges for those in credit whilst reducing charges for those in debt is going to end up with a very low quality customer base.

    These are exactly the customers that banks want most. They make the most money from the feckless.

    Harry Katz and I are not going to be contributing enough to keep their CEO well fed.

  4. Christopher Petrie 15th January 2019 at 9:52 pm

    Midland Bank (now HSBC) have a lot to answer for.

    Until the mid-1980’s, all bank accounts had charges to pay for the benefits used. Then Midland bank moved to “free” banking, so long as you remained in credit. Those poorer, or more disorganised, or just unlucky people hit by a shock in life were fleeced to subsidise the rest of us.

    This has gone on too long. Everyone should pay the fees due for the services they use.

    I cannot believe there are IFAs and former IFAs above arguing that some bank clients should get financial services for free – the same former IFAs who regularly tell us they used to charge fees to all work done when they were working! Why don’t they offer financial advice for free then?!

    • @Christopher Petrie

      The answer to your question:

      I would gladly have given free advice if clients would have given me their money and I could have lent it out at (only) 15%.

  5. Christopher Petrie 16th January 2019 at 6:52 pm

    Well that’s not free advice then is it?

    What did you do if a millionaire called to say they’d like a couple of hours to discuss investments before they used Hargreaves Lansdown?

    Would you give them 2 free hours, paid for by your less wealthy clients? Thought not.

    It’s how “Free banking” works though.

    • No it doesn’t. Banking is only free for those in credit. They use our money without paying interest (or paying very low interest) and use it to provide loans and mortgages are much higher rates.

      If the millionaire would allow me to use his money for free I would in return be happy to give him financial advice and if he was daft enough to go to HL and pay higher fees than I used to charge, I doubt I would be talking to a millionaire anyway.

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