End of free banking

savagej

CDes wrote: »

I don't think Free Banking will ever end because the government needs everyone to have a bank account for benefits etc.

The DWP can now arrange for payments of benefit to go in to your bank on the day you get in contact with them, say because it was not paid due to system error, etc. It is only certain banks they can do it with so I assume the use FPS, which is free so I think you are right basic accounts at least will remain free.

emweaver

I dont see why we should pay for such a service. The banks invest our money to make themselves money so why should we pay them too?

opinions4u

emweaver wrote: »

I dont see why we should pay for such a service. The banks invest our money to make themselves money so why should we pay them too?

The average balance in a current account is, from memory, around £1,200.

Assuming this is attracted at a nil interest rate and lent on at a margin of 4% after defaults the bank earns around £48 a year from it.

Each card costs around £4 to issue. Each statement costs £1 to issue. Each counter transaction costs around 60p. Each 3rd party ATM transfer fee costs between 15p and 30p. There are costs to paying direct debits and standing orders as well as receiving BACS credits. Cheques cost 40p to process. Cheque books cost £4 to issue. Fees to Visa and Mastercard simply for having their logos on the cards cost money too. Developing systems like Faster Payments has cost the banks a total of around £500m (though God knows how).

What I'm trying to say is very few banks can run a current account as a profitable entity in its own right.

The way they succeed is with their fees - these are targeted in the main at those who run their accounts badly.

The OFT is saying this fee structure is unfair.

The banks are saying they don't think it is.

But if the OFT win their court case you will see clear changes in the way that banks provide current accounts. And that change will involve more people paying fees than at the moment.

The new Halifax 'Reward' concept is the obvious example of this shift in charging structure. That seems to suggest that those in credit will continue to get free banking. But those who use overdrafts within agreed limits seem to be paying more than at present. Those who abuse their accounts will be paying less.

prowla

So, I give the bank an interest-free loan every month for the amount of my salary, that they can then play the stock-market with, and then I have to pay them for the privilege?
Hmmm - let me think about it...

opinions4u

prowla wrote: »

So, I give the bank an interest-free loan every month for the amount of my salary, that they can then play the stock-market with, and then I have to pay them for the privilege?
Hmmm - let me think about it...

Try living without a current account if you don't like it.

nobblyned

opinions4u wrote: »

The average balance in a current account is, from memory, around £1,200.

Assuming this is attracted at a nil interest rate and lent on at a margin of 4% after defaults the bank earns around £48 a year from it.

You missed the fractional reserve concept in this calculation.

If they hold £1,200 of your wonga, they will lend out more than that secured on your amount. Hence the profit will me much higher than you calculate.

Warning: I simplified massively, cos that's the only way I can understand it....

good link:

http://www.novapoly.com/articles/finance/fractional-reserve-banking-model/

opinions4u

I may be misunderstanding your point here.

That appears to show how organic asset and liability growth occurs.

It doesn't all happen at the same point in time though does it?

So while the figures I used are a general rule of thumb, they still stand.

Happy to be corrected by anybody who can put it in plainer English.

Ultimately banks will have reserves (previous retained profits not distributed to shareholders or reinvested), liabilities (money from savers and wholesale markets) and assets (money loaned out).

When the liabilties and assets don't balance you have a problem!

nobblyned

opinions4u wrote: »

I may be misunderstanding your point here.

That appears to show how organic asset and liability growth occurs.

It doesn't all happen at the same point in time though does it?

So while the figures I used are a general rule of thumb, they still stand.

Happy to be corrected by anybody who can put it in plainer English.

Ultimately banks will have reserves (previous retained profits not distributed to shareholders or reinvested), liabilities (money from savers and wholesale markets) and assets (money loaned out).

When the liabilties and assets don't balance you have a problem!

Not instantaneous, but ongoing. The example, whilst explaining the little stand-alone profit in current accounts, would also show minimal profit in savings accounts where interest paid is probably only a % or two less than the interest the money is re-lent at.

As I understood it, the organic asset and liability growth explains why they are happy to run any kind of account at all at seemingly paper-thin margins.

I admit my understanding is crude, I work in commodities rather than finance, and that's probably the reason why.....

Always happy to learn from those with more knowledge of how it works than me.

opinions4u

nobblyned wrote: »

Not instantaneous, but ongoing. Your example, whilst explaining the little profit in current accounts, would also show minimal profit in savings accounts where interest paid is probably only a % or two less than the interest the money is re-lent at.
The main difference being that the average balance in a savings account is significantly higher, transaction numbers are siginficantly lower and usually cheaper too. Risk of write offs is also lower.

The organic asset and liability growth explains why they are happy to run any kind of account at all at seemingly paper-thin margins.
That's the business they're in. Another example of paper thin margins would be supermarkets. If the very profitable Tesco cut their prices by 6% but maintained sales volumes at the same level they would no longer be profitable.

I admit my understanding is crude, I work in commodities rather than finance, and that's probably the reason why.....

I have never worked in commodities and despite far too many years in finance wouldn't claim to know everything.

Ultimately they need the deposits to be able to make the loans. They cannot leverage lending out of nothing and stay solvent.

nobblyned

Apologies, edited my post to be rather less annoying whilst you were typing your reply.