Banks take our money pennies at a time from a thousand different places.
How banks make money is in some ways is quite obvious. They charge us overdraft interest. They take deposits and lend it back at higher rates. That's straightforward, but it's just the beginning.
Current accounts
Some people think that current accounts are offered cheaply as a means for banks to encourage you to put money in their savings accounts and to take out their credit cards. But this isn't true. In fact, current accounts bring in £8.3bn a year. The Office of Fair Trading says:
"Personal current accounts generate more revenue for banks than savings and credit cards combined."
The same OFT report says that, despite free ATM withdrawals, Internet banking, telephone banking, and some banks' high levels of customer satisfaction, the current-account market is still not working well for customers, on the whole.
Bank charges
The banks make £2.6bn a year in insufficient funds charges. In 2006, 1.4m people paid over £500 in charges. The average revenue from an account is £152, so some vulnerable people are paying a huge proportion of this.
What's more, banks are making 220% pa on overdraft balances as a result. That excludes overdraft interest and £1bn in unpaid item charges (i.e. when a bank refuses to make a payment).
Foregone interest
£4.1bn is lost in credit interest or paid in high overdraft interest. Wealthier people who are careless about transferring their money to savings or investment vehicles lose out too. We don't have to accept no interest or virtually none on our credit balances. 88% (47.6m) of the active current accounts receive 0.5% interest or less, and that OFT data is from 2006, way before the base rate plummeted.
As for customers with no money, you don't have to accept an 18% EAR overdraft when you can get 10% EAR, or even 0%.
Packaged accounts
Banks love accounts that cost money in return for extra services , because this is where they get the bulk of their remaining current-account revenue. Why do they like them? Because most people don't use or need the majority of the perks. This doesn't deter people from taking what sounds like a bargain. They are for some; they're not for most.
Linked products
In order to get higher rates of credit interest, you're either charged a monthly fee or you have to take out some other product, like for example a guaranteed equity bond (the king of hidden costs). The linked product will rarely be anything like the best one on the market, and virtually always costs you a lot more than you gained from the better interest rates.
Savings accounts and cash ISAs
You're getting the gist, so I'll speed up.
Foregone interest
Again, people lose out with savings products by letting their money rot in low-interest accounts. The majority of savings are currently earning virtually nothing when it's possible to get 3.5% AER in the simplest most flexible type of savings account, the easy-access account.
Lost interest penalties
Many accounts sell themselves as easy-access but have the same penalties for quick withdrawals as savings accounts that require 30 days' notice. If you regularly take money out of your savings to pay bills, you could lose all the interest you should have earned that month. This must make banks millions too.
Linked products
Once again, savings accounts are often linked to some rubbish investment or other product. If you'd bought the two products separately you'd be much better off. Don't let the high interest rate seduce you on these offers.
Loans
Compulsory payment holidays
So many loans now have a compulsory, three-month payment holiday at the start, sold as a benefit. What's really happening is the lender charges you interest on the whole debt during this time, so it gets bigger.
Not only does this mean you'll have to pay more, but it also gives the lender an opportunity to sell the loan to you at a lower APR, but the real APR after the three-month holiday will be higher. This must make lenders millions extra a year.
Linked products
You can't fail to have heard of payment-protection insurance which is often forced on us when we take out loans. This enables lenders to offer lower APRs, making their loans seem more attractive, because they actually then make more money from the insurance.
Referrals
Often there are extremely well-hidden boxes that you have to tick if you don't want to be contacted by third parties. Lenders will happily reject your application and pass you on to some dodgy, high-cost, secured-loan provider in return for a fat commission.
Credit cards
There are more than 20 different expensive booby traps associated with credit cards. I wrote about twelve of them here.
Mortgages
Complicated fee structures
Take a look at all these possible fees:
- Arrangement fee
- Valuation fee
- Transfer of funds fee
- Higher-lending charge
- Redemption fee
- Completion fee
- Early-repayment charge
- Extended early-repayment charge.
To add to the confusion, many of these come under different names, such as booking fee instead of arrangement fee. Sometimes the names change over time to hide fees that are getting a bad name. That's why the 'mortgage indemnity guarantee' became the 'higher-lending charge', and it's all set to become the 'low-deposit-deal fee'.
Lenders come up with all sorts of unique fees, too. I just looked at Barclays, for example. It has a 'transfer of equity application fee', an annual 'Deedstore administration fee', and it even charges £25 if it needs to print out and post to you a duplicate annual statement.
Compulsory payment holidays
As with other loans, some mortgages have one or two months compulsory payment holiday, which builds up the debt and allows the lender to say the APR is lower than it actually is.
Linked products
As with other loans, the lender makes a lot of money with its overpriced protection insurance, which is much cheaper bought separately.
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