The Cash-Transfer Swindle!

Same-day electronic transfers between accounts are fast, secure and efficient. Alas, banks charge extortionate fees to provide this service.

As we've explained many times in the past, when choosing financial products, you need to look beyond the headline-grabbing rates by delving into the small print.

For example, mortgage lenders, banks and building societies routinely fleece their customers by overcharging for same-day 'telegraphic transfers'. These days, these fast bank-to-bank electronic payments are known as CHAPS transfers, after the Clearing House Automated Payments System.

According to mortgage broker John Charcol, mortgage lenders are ripping off borrowers to the tune of £23 million a year by overcharging for these same-day inter-bank transfers. What's more, the problem is even bigger than this, as banking, saving and personal-loan providers charge similar rip-off fees.

The true cost of arranging a same-day CHAPS transfer from one bank to another is estimated to be around £3, thanks to large-user discounts of around 90%. (Transfers between your accounts at the same bank normally don't attract this fee.) Indeed, if the bank sending the payment is itself a member of the CHAPS Clearing Company Limited, then the effective marginal cost is close to zero.

In 2004, CHAPS sterling payments numbered 130,000 per day, with a total daily value of around £300 billion, so it's a widely used, secure and efficient service. Alas, although the CHAPS Clearing Company Limited provides a "fair pricing strategy" to its members, these firms rip off UK consumers and businesses by inflating the cost of same-day transfers by as much as 1,500%! Surely modern technology should cut costs, not increase them?

For instance, when you complete the purchase of a property, your mortgage lender will charge you a CHAPS fee to credit the funds to your solicitor's account. Another charge is made by your solicitor to forward payment to the seller's solicitor. Thus, when you buy a property, you pay rip-off CHAPS charges twice!

Charcol reckons that with more than a million mortgage transactions taking place each year, mortgage borrowers are being fleeced to the tune of £23 million a year. Here are some of the worst offenders and the good guys:

Bizarrely, BM Solutions and Intelligent Finance are both part of the HBOS group, yet one charges £45 for a service which the other provides free of charge! Overall, the average CHAPS fee for the UK's top ten mortgage lenders is £26, according to Charcol.

Furthermore, the CHAPS scandal goes much further than ripping off mortgage customers, because it affects businesses, savers and unsecured borrowers, too. Indeed, anyone transferring large sums between banks using this secure same-day service is being taken for a ride.

For example, Northern Rock is a big player in the market for personal loans, yet it charges its borrowers a £35 fee for same-day 'express delivery' of their funds by CHAPS (BACS transfers are free, but can take up to a week). It also charges £22.50 for CHAPS transfers from its popular Online Tracker savings account. Banks also routinely overcharge businesses for CHAPS transfers: for example Bank of Scotland charges its business customers £20 for each CHAPS transfer (£12 via its online banking service).

As a shareholder in two banks*, I'm all for banks making a reasonable profit. However, charging £50 for a £3 service is, at best, highly questionable and, at worst, daylight robbery. As mortgage guru Ray Boulger of John Charcol comments, ".it doesn't take a rocket scientist to see these fees are completely over the top"!

Thus, it's high time that the powers-that-be investigated the market for CHAPS payments. Although the Financial Services Authority is already investigating mortgage exit fees, the scale of overcharging for CHAPS payments is even greater. Over to you, FSA and Office of Fair Trading!

More: Use the Fool to compare bank accounts, compare mortgages and compare savings accounts.

* Cliff owns shares in HBOS and Lloyds TSB.