August 2, 2008
The Undercover Economist: Bankers are laughing all the way to the bank
Going overdrawn can be an expensive business. In the UK, unauthorised overdrafts averaged £680m on any given day in 2006 – just over £10 per bank account. According to the Office of Fair Trading, the charges levied by banks on those overdrafts were £1.5bn, a tasty return of more than 220 per cent. Banks also make money by paying risible interest on positive balances – an incentive to keep your current account lean and, Doh!, to overdraw accidentally – and by other obscure charges. The Office of Fair Trading doesn’t like it and nor do many customers – although they rarely express their displeasure by switching bank accounts.
There are two common responses. People either grumble about money-grabbing banks or point out, smugly, that if only others would manage their affairs responsibly, they wouldn’t incur any of these charges.
There’s a certain amount of truth in both responses. Yes, banks are money-grabbing, but healthy competition would keep the greed in check. And, yes, careful customers are being subsidised, heavily, by careless ones. The trouble is that the whimsicality of the pricing makes it hard to find out which bank is offering a good deal. Most people realise that overdraft charges are steep, just as they realise that popcorn in cinemas is expensive and mobile-phone companies will all but pick your pocket if you make calls overseas. Knowing this doesn’t make it easy to find the best product, which means competition won’t work well. When competition works poorly, many customers lose out – even those who bring their own snacks to the cinema and use public phones on holiday.
The remainder of this column can be read here. Please post comments below.
It’s another regulation, another audit, another disclosure. And while I agree that we should implement the proposal, the history of the last century is a history of the big financial institutions fighting every incremental regulation tooth and nail and lobbyist. It takes a major bad event (Enron/FNMA/etc) to make a difference, even then, not much.
Posted by: R N B | August 2nd, 2008 at 10:18 pm | Report this commentThere already are websites that dedicate themselves to a similar solution with finances. Have you ever checked out Mint.com, it let’s you link all your financial products on one website and shows your spending habit.
And it should be noted, as someone who works in a bank, I see on a daily basis people who despite being told that they have spent over $1000 on fees in the past year decide to continue with their habits.
Posted by: Chris | August 3rd, 2008 at 9:34 pm | Report this commentWhen we moved to France we soon became aware of just what good value UK banks are! Here, we pay for everything - even online access to our bank account. And as for interest on current accounts - that’s for the banks! Writing a ‘rubber’ cheque is a criminal offence, and you lose your bank account afterwards. Forget looking at the competition, there is none. The variations in charges are so complex even the French equivalent of “Which” can’t unravel them; but the end sum is you pay the same wherever you go.
As for ‘accidental overdrafts’ in the UK - oh come on! Is it that difficult to watch your expenditure? As my old UK bank manager used to say (Yes, a real Bank manager!): “if you even think you might go overdrawn, call me. It’s when you don’t call me that I get stroppy (and expensive)”.
Why legislate for people’s fecklessness?
Posted by: Derek Tunnicliffe | August 5th, 2008 at 6:20 pm | Report this comment