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.
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.
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 firstname.lastname@example.org