Upfront charges
Today's proposal from Andrew Tyrie that banks should send their customers regular statements of how much they have been charged - including both actual charges and what they skim by paying interest rates below the market rate - is significant for two reasons.
First it comes from a Tory MP - and is possibly a manifestation of a Conservative party that increasingly sees votes in being the champion of the consumer rather than the voice of business.
Second, it's remarkably close to thinking that's been going on inside the Office of Fair Trading for some time - though has not yet been made public.
The competition watchdog is examining how banks make their profits from providing current account services, as an adjunct to an investigation of the fairness of penalty charges for those who breach their overdraft limits.
The OFT fears that what it describes as "so-called free banking" disguises a multitude of hidden charges and may not represent the great value for customers that the banks claim.
Those charges range from quite substantial transaction fees every time we use our debit cards abroad, to the interest we forego by holding our cash in current accounts that pay zero or low interest rates, and the interest lost when money is held in transit.
Tyrie's recommendation - which, as I say, is already being mulled by the OFT - is for the banks to send us a regular estimate of those charges.
What would be the good of that?
Well, it should give most of us much greater confidence to shop around for the best banking deal.
What's the downside?
Well, there would be incremental costs for the banks.
And there would be plenty of rows about how to calculate the implicit cost to each of us of receiving sub-market interest payments.
Should the reference rate be the bank base rate? Or should there be some standardised deduction for administration costs?
And the problem would be even worse if we were sent an estimate of how much we are paying over the odds in overdraft interest rates. The banks, rightly, would want to make some allowance for the riskiness of lending to each of us - but capturing the financial cost of that would not be easy or cheap.
The bigger criticism of the Tyrie plan is that it could be seen as excessively nannyish, an unwarranted interference in the god-given right of all commercial businesses to charge us how and when they like.
Maybe so.
But it is incredibly difficult to compare the costs of current-account services provided by different banks.
What amazes me - and I've told bank chief executives this over many years - is that none of them have sought to break ranks by providing a really simple charging structure that would engender consumer confidence.
I've long thought that the first bank to do this of its own accord would take a big step towards becoming the Tesco of the banking sector (alright, I know some of you will grimace here – but you know what I mean).
The palpable fact that there isn't the banking equivalent of Tesco suggest to me that the market isn't as properly competitive as perhaps it ought to be – and that it mightn’t be such a bad thing to force the banks to tell us what they really charge.
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None of the banks will tell us what the real cost is. Most are just waiting as long as they can until the OFT report. Then if the OFT recomends that charges are reduced they will just follow that guideline like credit card companies have done. Then you may see banks defend in court using the OFT guideline as there defence and refund any differences
lets be realistic, fiercely competitive race has forced banks to offer basic services free of cost, so where could they cover cost?? - a notorious manager suggested penalties and that worked for banks. A canny customer, who was happy to avail freebies earlier cried foul now.
may be time for fresh business ideas to cover costs for banks and reaching for amicable solutions for both canny customer and notorious + greedy banks.
Oh, um, hurr.
Banking charges and the interest they give is a real bug bear of mine. I never know what interest I am getting on my current account. It isn't stated and I don't know if it fluctuates on a whim of the bank.
What really vexes me is that when you contact their call centres (the only way they wish to communicate with the great unwashed such as myself) and ask questions like: What is the interest I am getting on my current account? What's the AER on the current account etc, the call centre representative will give a stock answer of "this adjusts on a daily/monthly basis and I therefore cannot answer that". When asked, "ok, well what is the interest, on my account, as of today?" I get equally stone walled. Now, the humour in this for me stems from the charges. i.e. they are very swift at calculating those if you go overdrawn in a month but very much less than forthcoming when asked what they are actually giving.
Another issue that makes me angry is my account with Halifax. I had the high interest account that requires you to put in a £1000 per month. I was without work for a period of eight weeks. Upon resuming work and getting the required £1000+ I naturally assumed the interest rate went back up. You know the answer. Nope, when I contacted them they said that the rate dropped via a computer automation system and needed to be manually lifted once the correct amount was being deposited. This was three months after my resuming work.
There is too little transparency in the market and were you to have that in any other consumer forum such as retail there would be an outcry.
They are quick to take and very slow to reward. Always bare that in mind when making any financial decision involving a bank and definitely show no allegiance...
Which supermarket will show us how much they mark up their goods to show us how much they are skimming from us, how soon will the government itemise exactly how much tax its takes from us each year, which TV staion will show us....blah blah blah. Banks are such an easy target, perhaps we should shut them all down and use cash if we hate what they do to us so much.
Dear banked off (#3),
"Banking charges and the interest they give is a real bug bear of mine. I never know what interest I am getting on my current account. It isn't stated and I don't know if it fluctuates on a whim of the bank."
How my heart bleeds for you!
You know those nasty men from BP and Shell. They just will not email me with the price of petrol whenever I want it and whenever it changes. They just refuse to tell me whether the garage 3 miles away is selling it 1p per litre more or less than the garage at the end of my street. They force me to go out and find out
for myself.
It's appalling, and the sooner those nice caring men from the OFT, Competition Commission, and Parliament pull their fingers out and compel them to spoon-feed me the better.
Running a bank adult - like purchasing petrol - is for adults. Children shouldn't be let loose near either.
I don't see a big technical problem with showing the interest rate forgone on a current account. Daily money market rates reflect short term risk free lending, which is exactly what a deposit is. Pick the appropriate benchmark rate, calculate the interest daily, and show the resulting monthly interest, average deposit and implicit interest rate. With overdrafts, simply show the rate split up into risk free rate and risk premium. (And give your customer an implicit credit rating, if you dare!!)
An admin charge should be left up to the bank, but they should show this separately, the whole point is to avoid all the deliberate confusion between interest, fees and penalties.
But why this simple piece of calculation would cost very much per customer I don't know. I reckon I could handle at least half a million of these calculations per month, on my home computer alone. Give me 5p per customer and I'll do it for all the banks, and I'd be rich.
If it were up to me, I'd forget about fees, go the whole hog and simply request banks to actually pay the minimum (risk free) interest on deposits. We have a minimum wage for labour, why can't we protect our money from exploitation in the same way?
This would still flush out any charges, and make people more likely to keep a adequate positive balance in the current account, and therefore less likely to go overdrawn. But they wouldn't want that, would they!!!
I live in Belgium. By law every January I receive an analysis of all bank & interest charges levied by my Bank. This does not include transaction costs for FX transactions. With credit card costs of €54 I pay +/- €100 per annum including on line banking secured by one time codes and foreign cash withdrawal facilities.
The biggest unmentioned scandal in UK banking is foreign transactions. UK banks ignore EU regulation 2560/2001 of the European Parliament and the decision of the Council of Europe dated 19 Dec 2001 relating to cross border payments in Euro, apparently because the amount is not denominated in Euro.Transfer orders given with SWIFT and IBAN codes are FOC up to €50.000.
I suggest that UK customers' foreign transfer orders are split two. 1) Buy Euros and 2) with these euro make a Euro transfer in accordance with EC law. Let's see how UK banks wriggle out of that one.
Of course the banking industry is not a competitive one. If I want to set up a language school, or a bakery, tomorrow, I can do so in a matter of days. If I want to set up a bank, however...Well, it's not as easy, is it? The industry will not be fully competitive as long as there is a regulator whose job it is to limit the amount of banks in order to prevent financial panics. As that is not likely to change, well, please tell me how much my 'free' current account is costing me, and send my kudos to the OFT.
banked off wrote...
"They are quick to take and very slow to reward..."
does this remind anyone else of a soon to be ex-Chancellor?
maybe there are some similarities between the private/public sector
The answer is that we need some new banks. The current crop have simply grown too big. Either that or they should be broken up into bite size chunks.
What regulation needs to do is force banks to make transactions happen, and happen quickly. Bouncing transactions costs the economy. Slow movement of money between accounts costs the economy.
Perhaps the simplest approach is to ban banks from making discrete charges for things and force them to use the interest rate for everything.
That way there is one number to look at.
"Today's proposal from Andrew Tyrie that banks should send their customers regular statements of how much they have been charged - including both actual charges and what they skim by paying interest rates below the market rate"
er......they do if you are a shareholder, it's called an annual report!
I agree with Roberts final paragraph, there is practically no competition in the banking sector.
I changed banks six months ago, and all the banks I went into didn't know how to deal with someone who was shopping around before deciding where to go. They didn't market themselves in a way that made easy reference to each other purely because there is no difference between them.
Whilst I'm sure there is nothing illegal in it, the banks operate as a sort of cartel, each working to ensure they don't offer any worse than the others, but also that they don't offer any better.
A lot of business groups are like this. Hotels are a classic example. When I challenged paying 26 Singapore dollars a day for internet when staying in Singapore (this is half the monthly fee a home user in Singapore pays) I was told that this was competitive with other hotels in the area. All that meant was that all hotels ripped off their customers. Banks are exactly the same. I'm sure they justify their high fees based on the fact that they are no worse than others.
For real competition, you need something akin to a price war to break out. When that happens, customers will win.
The investigations by the authorities need to go beyond just current account charges. Banks are actively abusing their position to make unjustified money in many other areas. Take paying off your credit card balance. In other countries if the payment is due by the 18th, then I can go to an ATM machine at 11.59pm on the 18th, make a transfer from my current account to my credit card, it is done there and then and is all ok. In the UK, you have to make your payment many days in advance, so that the banks can abuse your money while they do what is internal processing. Even when I make payment allowing 4 days in advance (so that I am missing out on interest on my current account), they then happen to take a bit longer to process the transfer, and then impose late payment fees and interest on my credit card. Isn't this also a case of false advertising by banks that advertising standards should prosecute on. They advertise up to 56 days free credit by taking a credit card, but actually the maximum you can ever get is only 52 or 53 days, due to their deliberately slow processing that you have to allow for.
Since the banks are so quick to impose fees on any kind of late or wrongfull action by a customer (eg going overdrawn etc), why is it that the authorities do not impose equivalent high fees (a fine) on the banks for every time they make a mistake? And they make many mistakes.
I have a case with HSBC on an old credit card. Firstly, they (HSBC) cancelled the credit card (after some fraudulant transaction had gone though on it), then later on, the actual physical card expired. After that they have taken out of my account an annual fee for that expired and cancelled card. This is an active act of theft by HSBC. That was 15 months ago and I'm still unable to get my stolen money back. If a customer were to walk into a bank and reach over the counter and steal any money, the police would be involved within minutes, and the customer would be arrested. We are meant to live in a society where the same laws are applied to all. Why is police action against the banks and their staff not taken when they break the law and commit theft?
If the Conservative Party becomes the "champion of the consumer", will they abolish the TV licence fee that extorts money from the general public with the threat of prison for those who don't cough up for a service they may or may not want!?!
Transparency on charges is only one way of making banks more competitive.
Another: take BACS away from the banks, and order it to put in place same day transactions.
At the moment banks are controlling transaction costs (through the ludicruos delay in payment settlements) to discourage customers from buying different services from different operators. With same day payments you could much more easily buy your current account services, savings, loans, cash point, international transactions all from different providers, getting the best of breed in each case. Having the banks owning BACS is like putting the supermarkets in charge of road infrastructure.
Another brilliant idea launched on this forum by someone a few weeks ago was portable account numbers. Get BACS to issue personal account numbers that are mapped to whichever normal account number, and an SLA of 2 days to switch. No need to move across any direct debits, or notifying your employer when you move banks.
Peter Key:
"You know those nasty men from BP and Shell. They just will not email me with the price of petrol whenever I want it and whenever it changes."
That analogy, what is the relevance? BP/Shell/Monolithic corporates all dislike (intensely) any form of transparency. So, two wrongs make a right? Great counter argument from you there. Perhaps you have too much momeny to care, not I. The energy companies such as British Gas are far worse. Energy goes up in price. Pass this along to the customer (immediately) prices go down and they then say "oh but we buy in blocks and thus cannot pass the reduction along immediately". With this argument, were there not a cushion to begin with. i.e. they bought a block prior to the price increase?
Paul Constable:
If a supermarket charges me Ex amount I can choose a competitot or an independant grocer. I know the cost! Bank services both interest charged/given is far less transparent...
Dick and Chris S have made valid points. The banking establishment in the UK is nothing more than a cartel. Setting up a bank is very difficult becuase it is very much known that it is lucrative. After all, it is a form of magic. Take £10, worth just that and then 'lend' it to someone with a pound added on as a charge to them for the privilege and you have just invented a pound from literally thin air. That is why lending was illegal many moons ago. It is also why, as stated, it is difficult to open a bank.
My gripe, was genuine. When I go shopping I know the cost of the items. The following week, I again, know the cost of said items. The banks rely heavily on smoke and mirrors.
Having looked into my ISA recently, I now note that, unbeknown to me, it is on a 'variable' rate of interest and currently sitting at... 4%. Outrageous.
Simply put, people who don't read contracts when they sign up for something (and this includes consenting to agree to any future changes to said contract) are idiots and need to learn the hard way. If they sign up, they agree. This includes bank charges. If you don't like it, get a basic bank account which doesn't have any lending facilities or conveniences like Direct Debit and Standing Orders. Or better still, get a mattress and hide your hard-earned under that. It seems that suddenly everyone has realised what was true all along: we are victims of a big machine. But crying about it doesn't really make you look clever. It makes you look stupid that you don't look before you leap.
Simply put, Banks who dont ensure their contracts are lawful by reading and understanding their own wording when they sell an accounto an individual are idiots and need to learn the hard way that they arent above the Law.If they sign a customer up, they need to accept that the customer can drag the Bank in front of a judge. This includes bank charges. If you don't like, County Court summonses get a solicitor with a basic under standing of Common Law in relation to penalty charges for breach of contract.
Or better still, get a mattress under which you can hide after refunding the customer's hard earned money (with contractual interest on top, natuarally) to withdraw their claims. It seems that suddenly everyone has realised what was true all along: we are victims of a big machine. But crying about aggravated damages in Court and going on Radio 4's Moneybox attempting to cloak you charges as fees for a service doesn't really make you look clever. It makes you look stupid that you don't look before you leap.
Here's an example of increasing banking charges.
I bank with Lloyds TSB.
I just made transfer of £500 to an overseas bank. I was charged a total of £30 for this. This struck me as being a bit steep. I looked back through my bank statements and found that an identical transfer 4 years ago cost £16.
Lloyds' charges have gone from £13 to £20. The receiving bank has increased it's charges from about £3 to £10.
That's all
Due to the inept handling by A&L of my migration to their bank (direct debits) my loan and credit card with Cahoot both incurred late payment fees, the credit card was fixed at £12 (after the OFT ruling on card fees) but the loan account fee was £30 so of course they will only reduce that fee after another OFT investigation whenever that will be. they are all as bad as each other. natwest used to charge £5 a month for overdraft fees (not for going over the limit) just to stay within the limit!!