Revealed, tricks banks use to make profit out of their ‘free’ accounts
THERE is no such thing as free banking in Britain, the head of the City watchdog warned yesterday.
In a major report, the Financial Conduct Authority revealed big banks make a profit from nine in ten of their current account customers.
It said that most banks offered ‘free’ current accounts, but used an array of tricks to squeeze cash out of people once they have signed up.
These include high overdraft charges, slashing interest rates for those who keep their balance in credit and flogging credit cards, personal loans and mortgages.
Banks raked in £2.3 billion a year from account holders who slipped into the red, the watchdog said.
Andrew Bailey, chief executive of the FCA, said: ‘This is an important piece of work [and] it provides more evidence that there is no such thing as free banking.’ As MPs demanded that banks come clean on hidden fees, the report also revealed:
Savings rates at major banks are up to 50 per cent lower than at other providers;
Overdraft fees account for more than 30 per cent of the income banks get from current accounts;
More than half of current account customers with a credit card took it out with their own bank;
Up to half of the profits banks make from current accounts come from just 10 per cent of customers – often vulnerable customers who are more likely to be hit with hefty overdraft fees, or savers who hold large amounts of cash in accounts paying little or no interest.
James Daley, founder of consumer group Fairer Finance, said: ‘It doesn’t seem right that it is the most vulnerable customers that end up contributing most towards the banks’ profits.’
Tory MP Simon Clarke said: ‘We all know there is no such thing as a free lunch – and now it appears there is no such thing as free banking.’
He added: ‘This report casts light on the extent of the hidden fees being levied on customers.
‘Hopefully, it will come as a wakeup call that banks need to take a more transparent approach.’
Liberal Democrat leader Sir Vince Cable said: ‘Banks should be open and transparent about how they make their money.
‘The worst situation is this pretence that banking is free when there are all kinds of charges hidden. Instead of being dishonest, banks should just be transparent about the cost.’
Justin Modray, of Candid Financial Advice, said: ‘This report is proof of what we suspected all along. Free banking is a myth.
‘Banks don’t give away anything for nothing and have just been find- ing other ways of covering the cost of current accounts.
‘Customers need to be very careful and play banks at their own game by being wary of overdraft fees, moving their money into the best savings accounts and avoiding expensive products.’
The FCA added that banks appeared to earn far higher margins on overdrafts compared to credit cards and personal loans. Savers with large balances are also particularly lucrative for banks.
More than six in ten consumers take out a savings account with their existing bank, while many people also keep large amounts of cash in their current account that they can access in an emergency.
But the savings rates offered by major high street banks are between 30 and 50 per cent lower than other providers, according to the FCA.
The amount of cash in non-interest bearing accounts also leapt from just 5 per cent in 2007 to more than 20 per cent in 2016.
This means that banks have access to a cheap source of money that they can use to fund mortgages and other types of loans.
The FCA said this so-called ‘funding benefit’ equated to about 40 per cent of total personal current account revenues in 2016.
Other fees – such as charges for making debit card transactions abroad and packaged current accounts – make up 30 per cent of the banks’ current accounts income.
On top of this, banks can profit indirectly from customers by selling them other products – for example credit cards, mortgages and insurance.
‘No such thing as free banking’