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May 25, 2012

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Staberinde

If I don't use overdraft services why should I subsidise those who do? My current account has been in credit for the last ten years. I bank online. I see no reason why the administration of my account, including ATM charges, shouldn't be covered by the interest I forgo.

Do you?

Chris Skinner

Sorry - "If I don't use overdraft services why should I subsidise those who do?"

The whole point of this article was meant to make clear that those who use overdraft services are subsidising YOU who gets free banking as a result of their punitive charges.

Chris

Staberinde

Respectfully, where is your evidence? How much does it cost a bank to administer the average online current account with ATM facility that is in credit over, say, a year's worth of average-level transactions?

Take that costs figure, add a 40% margin and tell us the result.

Taking last year's interest rates at, say, First Direct, how much higher would they have been for depositors if we paid the charges you estimate?

And kindly explain again why somebody taking out a loan should be subsidised by someone who isn't.

Particularly given that banks are able to derive additional value via leveraging the deposits of those whose accounts are in credit?

I find it difficult to believe that your proposal does anything except hit prudent account holders with modest sums in credit, while giving an interest windfall to those with large amounts in savings accounts and providing cheaper loans to the poor and imprudent.

By all means make your argument for such redistribution. I merely note that in the aftermath of the credit crisis, many commentators called for a lower volume of more expensive loans to people who represented poorer credit risk. Surely you propose the reverse?

Staberinde

Here's a back-of-the-envelope calculation using the Which? £180 annual bank charge figure.

To break even on a £180 annual account charge when the bank pays Band of England Base Rate interest on deposits (currently 0.5%) requires a £36,000 in credit.

At one of Halifax's savings rates (not current account even) of 1.6% the requirement is £11,250.

Let's look at it the other way. If I have £3,000 with my bank and receive 0.5% interest I'll earn just £15 a year. The break even with charges of £180 I'd need to earn 6% on that £3,000. That's 5.5% above base rate.

None of these indicate a good deal for someone who wants a basic, automated service and nothing more.

Chris Skinner

Talk to Andrew Bailey as he's the one saying free banking is rubbish ... and you seem to like the idea of free banking which is why you get rubbish interest rates on your savings and punitive rates on your loans.

Start making sense,
Chris

Jeremy Bosk

But the very poor cannot get credit except from Wonga and similar organisations. This will not change. At present they do benefit from no charges on their current accounts.

So the introduction of charges will only help the less poor and moderately well off who have credit histories that allow them to borrow from the banks. Even for the latter, charges will only benefit them if they borrow AND the banks reduce all other charges in compensation. Are those pigs I see flying past my window?

Robbing the very poorest to help those better off is a lousy idea. Andrew Bailey is either a moron or a hypocrite and not fit to look after lab rats, let alone human beings.

Nobody gets significant interest on deposit accounts so they are not actually relevant to anything or anyone.

Chris Skinner

As mentioned, the notion is that free banking is bad, which it is as it results in low interest and high charges in all other aspects of banking.

That is the focal area.

The part where I agree with you Jeremy is that introducing monthly fees for deposit accounts is unlikely to reduce charges or increase interest in other areas, unless that is ALSO part of the regulatory change ... which has been implied by Bailey.

As I don't know him personally, I am not sure about your final comments.

Chris

Chris Skinner

@Stabernide

You wanted evidence?

Barclays ‘free’ account

£8.00 fee for each returned direct debit
£22 fee for every seven days on an unauthorised overdraft
£74.00 total monthly cost

Lloyds ‘free’ account

£5.00 fee for each returned direct debit
£5.00 daily fee for an unauthorised overdraft
£105.00 total monthly cost

Natwest ‘free’ account

£6.00 fee for each returned direct debit
£6.00 daily fee for an unauthorised overdraft
£126.00 total monthly cost

There's loads of evidence out there if you just look.

http://www.usal.org.uk/news.asp?ID=104

Staberinde

Chris,

I'm in my late 30s, I don't earn megabucks and yet I've never once incurred a fee for unauthorised overdrafts or returned direct debits. I don't claim to be a paragon, but I fail to understand why I should pay for services I've never used.

I presume you don't expect to subsidise other loans,so why are you so keen to make overdrafts cheaper in particular?

And you've not addressed my point re: the availability of credit to the least creditworthy and its role in generating the credit crisis in 2007.

Surely cheap credit should *not* be so readily available to the poor? We've seen what happens when it is: housing bubbles built on unsustainable debt.

The lesson from the credit crisis is that we need to reduce household indebtedness, particularly among the least creditworthy. Reducing the price of credit to the least creditworthy is madness.

I'd be interested in your view.

Chris Skinner

Staberinde

If you cannot understand a basic concept, then the conversation is not worth continuing.

The basic concept is this: nothing in life is free.

You do not want to pay for something.

You currently do not pay for it, but it is not free.

It is subsidised by those who need credit.

That is not viewed as fair, and so a rebalance has to occur where those who want a service pay fair value for that service.

You are too similar to tax policy makers who think VAT should be raised on everything - especially food and housing - so that they can enjoy lower income tax rates.

These policies benefit the rich at the expense of the poor.

I am not a socialist, but I can equally understand why Andrew Bailey thinks that zero tax on deposit accounts (free) is not fair if the poorest are paying 50%+ tax rates to subsidise you.

Chris

Staberinde

Chris,

I appreciate that nothing in life is free. My understanding is that when a deposit account is in credit the bank invests/lends that money and earns interest on it, a fraction of which it pays to the depositor in interest. If the banks didn't make money in this fashion then of course a fee would be justified.

So you must agree that those in credit *do* pay for their banking. What is in dispute is how much (since this is not transparent) and whether what is paid covers the actual cost of the in-credit service (ie: excluding loans such as overdrafts).

A number of banks already segment their custom with fees for deposit accounts. First Direct, for example, charges a monthly fee unless customers deposit at least £1500 a month. Unless you can provide alternative figures, surely we should presume that these figures are a guide for the commerciality of free banking?

It seems our discussion reduces to differing views on which services should be bundled into a standard current account. I see no reason to include loans/overdrafts, just as I see no reason to include travel insurance.

Obviously, the more transactions and ATM withdrawals an account sees, the greater the cost to service the account. So I agree that any flat fee model (including the case where flat=zero) favours those who undertake more transactions and use ATMs more.

The more equitable solution therefore might be PAYG banking, with charges levied on a per-transaction basis. This would be more consistent with your argument. However, I fear it might also hit the poor hardest, since the poor would tend to accrue charges on smaller amounts, creating a higher effective marginal charge rate.

Surely the current fee model at least reflects the fact that banks require stable deposits in order to function? Per-transaction or admin fee banking would alienate customers when they are younger, undermining their affinity for banks when they are older (more valuable) depositors and driving them to put their money in alternative vehicles such as equities?

I'd like to see an analysis of how much it costs banks to provide each service: transaction processing, ATMs, chequing (OK, not for much longer), mortgages, overdrafts, arranged loans, statementing, branch customer service (etc.) I'd also like to know the true value of deposits to banks; not just in terms of differential interest rates but also in leveraged terms.

Only when we have these figures can we accurately judge who is subsidising whom.

Best regards,

Stabs

Steve

I am enjoying the analysis on 'free banking' and would like to provide a couple of observations from my experience of working with bank charges before the introduction of 'free' & packaged/travel insurance & o/d inclusive accounts i.e at the time Midland introduced 'free' banking many years ago:

Prices (not necessarily costs) were always accessed relative to individual account actual usage: e.g. 60p for chq debit, 70p/% on cash transactions, 17p for automated ATM/BACS, 30p per chq deposited etc. with all charges incurred irrespective of debit/credit & regardless of amounts (it's only creditcards where amounts are applicable to the charge owing to the banks' liabilities to the supplier- but that's another story)

Balances, were assessed relative to Base Rate. Many years ago, such rate was a material 10% to 15% meaning that we banks would internally calculate the value of current ac balance against the per item activity prices to assess cancelling out the applicable charges. Nowadays, the irony is that the balance is more valuable in Bank's Balance Sheet terms as opposed to the actual Base Rate/LIBOR %, since retail funds are 'sticky' & can be lent 10 times over & thus ensure stability of the financial institution.

Looking more at the concept of chrages & bank's income, an interpretation might be that:
- Balances: Current Acs & Deposit Balance net interest income, coupled with charges from customers cover running the bank's infrastructure systems & branches etc.
- Commission: The fees & commissions often looked like profits!
- Lending: The income from lending at higher rates than offered on deposit is the 'risk margin' were often equated to the funds put aside to pay for the bad debts incurred.


The other element to consider alongs side the ethos of charging is of course the market place. It is continuing practice for business accounts to be levied charges on current account activity - the basic current ac activity is a service provided by one business to another & is paid for. In a similar manner, telecommunications are billed between supplier & user - again with different markets segments enjoying different terms such as 'free' local calls - but woe betide you if you dial an 0870 number, or talk for longer than 59 minutes...

Excluding the debatable 'value' of credit balance held on an on-demand current ac, as suggested by Chris before, banking & telecoms do have some similarities.

Paul Love

Chris,
Have the supporters of such charges considered the wider desire to reduce the circulation of cash in the economy and convert cash transactions to electronic payments?

Recently banks have made huge investments (in PR at least) in contactless cards and mobile payments. The small but growing transaction volumes could easily dry up overnight if banks started to charge for providing the banks accounts that are require to send or receive such payments, while cash remained free to use.

In the recent past banks have complained about the cost of handling cash and cheques. While charging for bank accounts might be one way to kill off cheques, it will certainly increase the use of cash.

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