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Friday, March 25, 2005

Your Bank's Worst Tricks

By Cliff D'Arcy (TMFCliff)
March 23, 2005

The UK's five biggest banks made a combined profit of £30 billion last year, which sounds like nice work if you can get it!

Don't get me wrong: I don't object to banks making bumper profits. After all, I'm a shareholder in HBOS, the UK's fourth-largest bank, so I've benefited from its success. What's more, I've defended the mega-profit of Royal Bank of Scotland, the UK's second-largest bank, in a TV interview. Also, it's worth noting that the UK's three biggest banks are among the top ten banks in the world - and our big banks make most of their profits abroad.

However, the conduct of our banks is less than squeaky clean here in the UK. What pulls my chain are the sneaky tricks that they use to seize more of our hard-earned cash. Here are my "unlucky thirteen" pet hates about banks. Most building societies behave similarly, but Nationwide BS is an honourable exception!

General gripes

1. New customers good, existing customers bad (with apologies to George Orwell!)

"New customers get better deals than loyal, lifelong customers." This sounds like a recipe for commercial disaster, doesn't it? Yet it's how almost all banks behave. (Nationwide BS is running a great advert at the moment that features an irritating banker who explains that his bank's best mortgage deals are reserved for "brand-new customers only"!)

Nationwide BS is one of a few mortgage lenders which give all borrowers access to their best rates. From my background in marketing, I know that it can cost up to ten times as much to recruit a new customer as it does to retain an existing customer. Thus, I believe that our banks' obsession with winning new customers is just plain daft. Guys: look after your faithful customers first - or someone else will!

The solution? Start looking for a new home loan with a visit to our Mortgage centre.

2. Selling over-priced insurance and investment policies

Ever heard of the Rule of Three? It's a law that I invented when I was a marketing manager back in the Nineties. It illustrates the price gap between products from high-street banks and rival Best Buys. A classic example is home insurance, where the premium charged by a policy from a high-street bank can be three times the cost of similar cover from a Best Buy provider.

In my experience, the Rule of Three neatly illustrates the wide variations in the cost of most financial products, such the interest payable on a personal loan, credit-card interest rates, plus premiums for car, home, life and travel insurance. So, if you don't want to fall foul of my Rule, don't buy these products on the high street!

The solution? Start your search for cheaper quotes in our Insurance centre.

3. Exploiting changes in the base rate

When the Bank of England changes its base rate, financial companies quickly follow suit. However, they are slow to cut mortgage rates when the base rate falls, and quick to raise them when the base rate is hiked! What's more, many banks sneakily use base-rate changes to increase their margins and profits. As this article proves, lenders exploit homeowners by tweaking interest rates to their advantage!

The solution? Find a happier home loan in our Mortgage centre.

Bad bank accounts

4. Holding up cheques and other payments

Although cheque use has almost halved since peaking in 1991, we still write nearly two billion cheques a year. However, if you pay in a cheque on, say, a Monday, you won't start earning interest on it until Wednesday at the earliest, when your bank "clears it for value". The worst accounts take up to ten days to clear cheques for interest purposes! And, while this money is in limbo, banks are making money and we're losing out. It's reckoned that banks make upwards of £60 million a year from these payment delays, yet already have the systems in place to provide same-day clearing.

There is another lacuna ("gap") when banks process electronic payments. I pay several bills using standing orders or BACS payments, yet these payments reach their recipients up to five working days after being debited from my account. In other words, banks earn up to five days' interest at my expense. An official taskforce is due to report on payment delays next month, but I'm not holding my breath!

5. Ridiculously expensive overdrafts

Only a loan shark would lend money at, say, APR of 100%+, correct? Nope! High-street banks normally charge sky-high rates and outrageous penalties on unauthorised overdrafts, as this article reveals. Which? estimates that UK banks make £3 billion a year from charges on unauthorised overdrafts. What's more, as well as interest on approved overdrafts, banks usually levy ongoing arrangement and review fees for larger overdraft limits.

Then again, if you've made a one-off slip-up, you can charm your bank into refunding or waiving these ridiculous fines. Once last year, my wife slipped over her fee-free overdraft limit for just a few days, and was hit with £2 of interest and a whopping £80 of charges. My strongly worded letter led to a prompt £80 refund, after our bank realised just how much it stood to lose if we moved our business elsewhere!

The solution? Find a brilliant bank account in our Online Banking centre.

Cruel credit cards (or "Weapons of Money Destruction"!)

6. Minimum monthly repayments on credit cards

As I explained in this article, minimum monthly repayments are pure evil. For example, a balance of £4,000 can take almost 54 years to pay off, thanks to minimum repayments of 2% a month! Shocking stuff, eh?

The solution? Don't pay interest on your plastic for up to nine months - get a 0% card today!

7. Charges on overseas transactions

As we explain in this article, banks sneak in an extra charge when you buy goods overseas or pay in a currency other than sterling when buying from foreign websites. Overseas purchases account for about a tenth (10%) of our total credit-card spending, or roughly a billion pounds a month. And, thanks to their sneaky 2.75% currency conversion charge, our banks pocket £330 million a year at our expense. Crikey!

The solution? When you go on holiday, take one of the Best Buy cards listed in this article.

8. Unfair treatment of repayments

Say you transfer an existing balance of £3,000 to a card that offers 0% interest on balance transfers for nine months (but charges 15.9% APR on purchases). You then buy £200 of goods on this new card and repay £200 after your statement arrives. If banks played fair, this £200 would be knocked off your £200 interest-bearing bill for purchases, agreed?

But banks don't play fair: 99% of cards use your repayment to knock £200 off your 0% debt. The upshot is that you'll start paying the standard interest rate on all of your purchases until you've cleared your entire bill in full. Ouch!

The solution? Choose a 0% card that doesn't charge interest on balance transfers AND purchases!

9. Late payment charges

If cardholders don't pay their bills on time, they should be penalised, if only to teach them a lesson and keep them on the straight and narrow in future. However, credit-card firms hit customers who pay late, bounce payments or breach their credit limit with a whopping £25 fine. Note that the vast majority of these computer-generated penalties involve little or no human intervention. Hence, banks are making hundreds of millions of pounds a year from these fines. Still, although I'm terribly forgetful, I don't suffer these fines any more, as I pay my minimum repayment (or my entire bill) by monthly Direct Debit.

10. Interest calculations on credit cards

You'd think that there would be one clear, government-approved way to calculate APRs (Annual Percentage Rates) for credit cards, wouldn't you? Then you'd be wrong, because there are up to eleven different ways to calculate card interest, as point three of this article demonstrates! Let's hope that the Treasury Select Committee (which is investigating this market) puts pressure on card issuers to bring in a single formula.

The solution? Take a breather from paying interest: get a 0% card!

Second-rate savings accounts

11. Dormant savings accounts

This scam makes my blood boil, because it hits the vulnerable hardest, including elderly and disabled consumers. Banks lure in savers with headline-grabbing rates and then quietly cut rates once demand slackens off. What starts out as a market-leading account can end up paying interest of as little as 0.1% a year, as this article reveals.

The solution? Open a high-interest savings account via our Savings centre.

Pathetic personal loans

12. Branch-based loans are very expensive

If you go into your local bank branch to arrange a personal loan, you might as well wear a T-shirt with "Please burn my money" on it! As we reveal in Five Ways To Find A Great Personal Loan, the high street is the worst place to arrange one, because you'll pay well over the odds. Which would you prefer: an interest bill of £500, or one of £1,500?

The solution? Check out the great deals in our Personal Loan centre.

13. Bank and insurers gang up to rip us off

Before joining the Fool, I spent eleven years in the payment protection insurance (PPI) market. This optional insurance is sold alongside personal loans, credit cards, mortgages, etc. However, PPI is massively overpriced, often poorly designed, and frequently mis-sold. My guess is that lenders are raking in about £4 billion a year of excess profits from pushing PPI. Indeed, in order to boost their returns even further, leading banks have become both lender and insurer. They have set up subsidiary "captive" insurance companies, many of which are located offshore, particularly in Ireland.

For example, Barclays, HBOS, Lloyds TSB and Royal Bank of Scotland all use one or more "in house" insurers. This stifles competition and enables these firms to keep both "the penny and the bun". One industry insider told me that Barclays makes £450 million a year (about a tenth of its total annual profit) from pushing PPI. That's blatant profiteering, if ever I've seen it!

I hope that this article has opened your eyes to some of the everyday financial rip-offs. Good luck with your search for better products and providers!


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