The Daily Telegraph - Saturday - Money
PERSONAL ACCOUNT
To get the best deal from your bank, keep your eyes peeled for hidden costs
There’s no such thing as free banking. So Andrew Bailey, the head of the Financial Conduct Authority (FCA), reminded us this week as the regulator published a startling insight into how Britain’s banks made their money despite offering “free” in-credit current accounts.
The new FCA report showed how banking was dominated by a handful of firms – the six biggest banks now account for 80pc of Britain’s personal current account market.
Big banks make up for free current accounts by trading on their customers’ loyalty: giving them bad deals on savings, charging high overdraft fees and encouraging them to buy extra products in-house rather than shop around.
The FCA found banks offering their loyal customers savings rates that were 30pc to 50pc lower than rates available elsewhere.
Surprisingly, it indicated that part of the blame might lie with the big banks’ branch networks. Branches have been shutting at an accelerating rate and a study published this week, commissioned by Nottingham Building Society, estimated that over the next five years or so a further 2,400 branches could close, a quarter of those that remain.
But while the loss of branch services is a problem, especially for those who don’t wish to bank online or who live in rural areas, branches have also imposed hidden costs on customers, by helping the biggest banks attract and retain customers who accept bad deals. The FCA found that higher interest rates were offered by banks without branches.
Banks can also use branches to help cross-sell customers extra products. More than half of current account customers with a credit card have one with the same bank. A third of mortgage holders use the same bank for their current account.
For those who choose carefully, such as readers, there are still good deals to be had. But ironically, this may actually help to sustain the status quo. That is because financially savvy people who shop around for deals are by definition not loyal customers. They are price-sensitive, the type that regularly study best-buy tables. As such they are very likely to switch banks again.
With a far less reliable set of customers, “challenger” banks need to pay much better interest rates to keep them, raising their cost of doing business. It’s great news for those of us in the market for bargains, but it won’t help the upstarts to challenge the status quo.
The FCA may now tighten rules on overdraft fees in a bid to protect vulnerable customers from high charges. But as Mr Bailey said, banking is never free. One way or another, customers always pay. The report pointed to the risk of “waterbed” effects, where pushing down fees in one part of the business pushes them up elsewhere. Reducing profits on overdraft fees could push banks towards monthly charges for all current accounts, even when they are in credit.
For now, you can take the benefits of free-if-in-credit banking and avoid paying its hidden price, but only if you keep your wits about you. Study best-buy tables and review the rate you are getting on your savings. Resist cross-selling. Switch providers for better deals. Understand how high your bank’s overdraft fees are – and don’t fall foul of them. For as long as the cost of banking is hidden, it will continue to fall heaviest on those who don’t pay attention. Keep alert.