Answering bank charges skeptics: pls help....

Nathan_Spleen

MarkyMarkD wrote: »

Interest foregone might be a cost, but it's not a realistic one to include in any form of terms and conditions because it depends on lots of things. It's also subjective - is it based on some form of standard transfer price, should it be simply set at BBR, or LIBOR, or whatever.

It does not take a lot of nous to work out that the average current account with an average balance of less than £500 (say) is worth about £2.50 to the bank in terms of interest foregone, calculated at 0.5% base rate. That's not anywhere near the cost of operating a current account.

Even at (say) 0.8% LIBOR, it's only £4 a year.

Honestly, anyone who finds issue with "free if in credit" due to interest foregone is clutching at straws. The credit interest rate payable on the account - whether 0%, 0.1% or something larger - is clearly stated, and there is no hidden charge.

This is utter twoddle.

The margins banks make on lending money have never been higher and the pool of free customer's cash they use to lend has never been deeper.

Foregone interest is the single largest source of revenue from personal current accounts and rakes in approaching double the amount than that of insufficient funds charges.

Graham_Devon

Nathan_Spleen wrote: »

This is utter twoddle.

The margins banks make on lending money have never been higher and the pool of free customer's cash they use to lend has never been deeper.

Quite right that was twoddle.

MarkyMarkD

Nathan_Spleen wrote: »

This is utter twoddle.

The margins banks make on lending money have never been higher and the pool of free customer's cash they use to lend has never been deeper.

Foregone interest is the single largest source of revenue from personal current accounts and rakes in approaching double the amount than that of insufficient funds charges.

I almost cannot be bothered to answer this, because it's so stupidly wrong.

The profit banks make from lending is not profit from foregone interest. It is (obviously) interest earned on the risky activity of lending, which requires systems, processes, and capital, all of which warrant a rate of return.

The real value of interest foregone to the banks is the opportunity cost of borrowing the money elsewhere. Something like average savings account balances - which are very low indeed. Perhaps something like the 0.8% I quoted.

If you think that is far more than the revenue from bank charges, you are not worth discussing anything further with.

Nathan_Spleen

''And what is the price? Well, my Lord, the price is broadly free for the credit customer, except of course we retain the difference between the interest rate that we give the credit customer and whatever commercial interest rate we are able to achieve on the money deposited, and that can be regarded as part of the price.'' Geoffrey Vos QC for Nationwide.

MarkyMarkD wrote: »

If you think that is far more than the revenue from bank charges, you are not worth discussing anything further with.

''Banks typically use these credit balances to earn revenue in other parts of their business. The current account business is usually paid an internal transfer fee by the section of the bank that uses customers funds. The difference between the transfer price and the interest they pay the account holder is called net interest income. According to data from 16 banks net interest income is the largest source of PCA revenue at 50% or at least £4.1b in 2006. Net interest income is a key driver of the PCA business model.'' OFT PCA Market Study.

MarkyMarkD

D'oh.

What were prevailing interest rates in 2006? And what are they now?

Nathan_Spleen

MarkyMarkD wrote: »

D'oh.

What were prevailing interest rates in 2006? And what are they now?

http://lmgtfy.com/?q=prevailing+interest+rates+for+2006+and+2009

MarkyMarkD

I know the answer, you daft ha'p'orth. It was a rhetorical question.

Quite obviously to everyone but yourself, a market study stating that banks made a lot of money out of current account balances at a time when base rates were around 6% is completely irrelevant now that they are 0.5%.

Nathan_Spleen

MarkyMarkD wrote: »

I know the answer, you daft ha'p'orth. It was a rhetorical question.

Quite obviously to everyone but yourself, a market study stating that banks made a lot of money out of current account balances at a time when base rates were around 6% is completely irrelevant now that they are 0.5%.

Rhetorical or not, my idea of debate does not include running around looking for data to support your argument.

To say that the 2006 figures are 'irrelevant' simply becuase of record (and no doubt temporarily) low interests rates some 2 or 3 years on is desparate. You are also failing to account for the years when interest rates were in double figures and by your own back-of-an-envelope formula would net the banks substantially more than even the 06 figures.

''It is important to remember that most PCA customers might not earn interest at the rate of the banks' internal transfer price and so net interest income is greater than the interest consumers forgo. We estimate that the internal transfer rate for the six main banks was less than 5 percent in 2006.'' OFT PCA Market Study.

MarkyMarkD

If you knew what you were talking about, you wouldn't need to "run around looking for data" to understand that base rates have fallen substantially between 2006 and now. Anyone with one iota of awareness knows that to be true.

To quote you about 6 posts ago "Foregone interest is the single largest source of revenue from personal current accounts and rakes in approaching double the amount than that of insufficient funds charges." If you had suggested that whilst this might have been the case in 2006, it was not in the current economic circumstances, your arguments might not be completely nonsense. But as you simply stated this as a fact, based on your naive failure to review the continued applicability of some three-year-old research, your arguments are, currently, complete nonsense.

Nathan_Spleen

In summary my argument is that Net Interest Income is the single largest revenue earner from PCAs - out-stripping insufficient funds charges by a long way. This was the case in 06 and overall would have undoubtedly been the case for the vast majority of years in the centuries before. And although we are in a brief period of low interest rates, as sure as night follows day, rates will rise again. So overall the Market Study findings for 06 will apply historically and in the future.

Your argument seems to be that as a result of today's unusually low interest rates the findings of the Market Study are ''out of date'' and therefore somehow irrelevant. The fact that a brief blip in interest rates means less NII revenue for a couple of years is a complete non-point.

Now, this is a real stab in the dark, but it could be that the OFT's Market Study into PCAs may have been a tad more comprehensive than your analysis. But it's only a guess mind.