Why a bank charges win doesn’t mean the end of ‘free banking’

Finally, the flick-flack nature of the media means that having initially helped champion bank charges reclaiming some are now trying to hastily put together pieces saying… a win for the OFT in the test case won’t be good for customers, as it’ll mean the end of ‘free banking’. It was always bound to happen.

Yet actually much of the argument is built on bluff and bluster rather than hard facts. Let me set out my off-the-cuff response.

  • Free banking doesn’t exist so how can it end?
  • We do not have free banking in the UK, we have ‘fees-free banking if you’re in credit’. Ask anyone who is overdrawn if their account is free. Even if you’re in credit there are a myriad of other charges that banks levy, and with most giving a paltry 0.1% in-credit interest but charging 14%-18% for you to borrow it back, ‘free’ is a true misnomer.

  • If they could charge fees they would’ve done already.
  • A bank’s job is to make money, and they’re very good at it. Win or lose, be assured many dedicated bank brains will be working on new ways to generate profits from consumers. That’s what they do, and very successfully.

    It always makes me laugh that articles often refer back to the April 06 OFT opinion that effectively reduced credit card charges and say “lots of new credit card charges have been introduced because of the OFT case”.

    This makes no sense. New credit card charges were launched because the bank found another way to bamboozle customers into giving it more money. Do you really think once they thought of this, they wouldn’t have introduced the charges anyway?

    When it comes to the banking sector as a whole, remember it makes £40bn a year; and I’m sure it wants it to be £50bn – whether or not it has to pay back bank charges reclaims.

    Yet the reason they haven’t is simple…

  • The current account market is ferociously competitive.
  • Banks are desperate to win customers, hence right now you can get a 0% overdraft for a year from A&L, or 8% in-credit interest from Abbey or £100 for setting up a new First Direct account (See best bank accounts for details). The current account is the building block of finance; it’s more than a mere product, as the data gathered is used to cross-sell us many other products. Any bank who introduces a fee will haemorrhage customers, and others will lap up the commercial opportunities and suck in their customers with fees-free accounts.

    Remember it’s estimated a billion pounds has already been paid out.

  • Blame the credit crunch more than bank charges.
  • Frankly for the banks, while the bank charges campaign is a PR disaster, the credit crunch is a much more pressing and costly problem. The money the government has pumped into Northern Rock (£24bn) easily dwarfs every bank charge from every bank over the last six years. While the bank’s spin suggests they’re “miserable due to nasty reclaimers”, frankly their issues are far more inflicted by US sub-prime borrowers than UK reclaimers.

  • If you’ve never had a charge, no change is even more likely.
  • The well-managed account holders who the spin says “will lose out” are actually, if anyone were to lose out, the least likely to. That’s because they’re the ones the banks want the most.

Yet this isn’t just about the money…

Yet even if fees-free in-credit banking were to end, not that I think it will, then that still wouldn’t mean the bank charges campaign is wrong, for the following reasons:

  • They’ve been legally unfair
  • Assuming the OFT win in court, that’s because banks have been levying unlawful charges on millions of people for years. Why should they get away with this to the detriment of millions?

  • There’s rate competition, but no charges competition.
  • Another oft-quoted myth about bank charges is “if you don’t like them why don’t you switch bank.” Yet there really is virtually no competition in the bank charges sector and never has been, so where do you go?

  • No single issue has better educated consumers.
  • A bank’s job is to make money, simple as that. It’s there to flog you things. Yet for years too many people have believed their bank’s their friend. The bank charges campaign has opened the door to a new well-placed scepticism; it means that people finally realise the bank isn’t on their side and isn’t always right; it can be beaten, and we should be cheering such a great move forward.

    The bank charges campaign opened the door for the PPI misselling and Mortgage Exit Fee reclaiming.

  • People often have no choice about how they pay
  • Over the last few years more and more companies have pushed, discounted and cajoled us into paying by Direct Debit. If you don’t you pay more; or in some cases can’t even get a deal. When you factor that it in to the ‘manage your money argument’. It gets very difficult; with automated payouts if you dont have the money, it disappears anyway. Direct Debit bouncing is a big trigger for many bank charges.

  • Banks invented bank charges to make money, they’re not being ‘stolen from’.
  • A line commonly used against the campaign is “these people who go beyond their overdraft are stealing money from the banks; they should be punished.” Again, this is simply believing bank spin; bank charges were introduced to aid profitability.

    In days of yore, if you attempted to pay a Direct Debit or cheque with insufficient money in your account it simply wasn’t paid out. Then it changed, probably because some bright banking spark decided that more money could be made if they did pay out. Now, the real system is hidden, but it works like this:

    How overdrafts really work:

    Authorised overdraft limit: £1,000
    Unaurthorised hidden ‘paid limit: £2,000
    Unpaid beyond that

    You have to admire the profiteering genius of this system. Instead of not paying, the banks created a system where they would pay out, but would charge £35 a pop for every transaction – no matter how small – beyond that limit. It’s no wonder they now make from £1.6bn to £3bn a year from this. In the past once you couldn’t pay out you’d know as the payment wouldn’t go through. Yet this new system meant many many more penalty charges could be levied as people paid for things on cards in stores, and all went through fine without realising there’d be a £35 charge every time.

    If banks didn’t want people to take the cash, they simply wouldn’t pay it out.

Frankly I could go on… (as you probably realise) there are many reasons to support this. However there is one more important note to make.

Bank charges should be an indication that we need to manage our money better

While I believe bank charges are unlawful and my hope is the OFT test case will prove it so, the best way to deal with them is still to avoid them. We must learn to be defensive consumers; of course, once you’re in the snowball trap of a set of charges breaking out is impossible (see the Bank Charges article for an explanation), yet there are people who’ve had bank charges, reclaimed them and had more, and this does mean some may not be learning from the experience.

It’s the reason I didnt particularly support the claim for ‘exemplary damages’ that one bank charge reclaimer tried. This isn’t about putting those who’ve had bank charges in a better position than those who haven’t. It’s about making the charges proportionate under UK law – which they’re not.

We have our role to play too. Learning decent money managment (see the Budgeting guide is our greatest weapon against bank fees. And while we should champion fighting the bank’s unlawful actions we must also take on our own behaviour to ensure we don’t give them the opportunity to snatch our cash. Sadly we’re a financially illiterate nation and that has to change too (for a basic start point read the guide)

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