Is Banking Really 'free' as they claim?

cepheus

Here's an interesting way of looking at it:

Let's say you are £1,000 in credit, and the bank pays you 0.5% interest. In one year you will get £5.

The bank lends your £1,000 to someone with an overdraft, charging them 15% interest. The bank takes £150 by lending your money to this person.

The bank gets to keep £145 of the interest earned by lending out your money, and gives you £5.


The banks are effectively charging you 96% of the money earned by lending out your money.

If an estate agent rents out the flat you invested in, they may take 15% commission. When banks 'rent out' your money you have saved, they can take 96% commission!

And they claim personal current accounts are free! The scoundrels!!

I guess the flaw in their argument is that they don't take into account arranged loans such as mortgages, which perhaps constitute the bulk of bank lending?

ColdIron

I've never really bought into the argument that bank accounts aren't free and view it more as a thinly veiled attempt to justify paid for current accounts

The premise also doesn't hold up, banks don't charge me for making a profit on my money any more than steel producers charge miners for digging ore out of the ground

rb10

cepheus wrote: »

Here's an interesting way of looking at it:

I guess the flaw in their argument is that they don't take into account arranged loans such as mortgages, which perhaps constitute the bulk of bank lending?

You are absolutely right. The vast majority of lending is on mortgages, with decent deals currently being written around the 3% mark.

You then need to take off a small amount for those who don't pay their loans back.

Take off a fair chunk more for the administration, staff costs and premises costs that apply to both the depositor and the borrower.

Then also remember that you are entitled to instant access to your money, so they can't lend the whole £1k out, but need to keep a percentage of it back as cash (earning next to nothing).

Unfortunately, none of this was considered at all in the article!

opinions4u

Unsecured lending isn't very profitable when write-offs exceed interest charged.

Mortgage lending has a margin of around 2%, before write offs - which are more significant in today's world of negative equity.

Banks can raise money wholesale (including government at the moment) or retail, into savings accounts or current accounts.

Paying a fiver a month to current account customer, or 3% interest as some do, doesn't make for massive profits on lending margins.

The cost of keeping easy access money available on demand, running branches, ATMs, online banking services, call centres, issuing cards, cheque books, running staff pension funds etc isn't free.

Looking at Nationwide, I think their declared profit is something like 0.2% of all their deposits. That is wafer thin.

Masomnia

You always have the option of cutting out the middle man and lending the money to someone yourself.

cepheus

Masomnia wrote: »

You always have the option of cutting out the middle man and lending the money to someone yourself.

Yes but there is the added expense of baseball bats

lvader

Using the same arguments my bank is paying me to bank with them.

cepheus

opinions4u wrote: »

Unsecured lending isn't very profitable when write-offs exceed interest charged.

Mortgage lending has a margin of around 2%, before write offs - which are more significant in today's world of negative equity.

Banks can raise money wholesale (including government at the moment) or retail, into savings accounts or current accounts.

Paying a fiver a month to current account customer, or 3% interest as some do, doesn't make for massive profits on lending margins.

The cost of keeping easy access money available on demand, running branches, ATMs, online banking services, call centres, issuing cards, cheque books, running staff pension funds etc isn't free.

Looking at Nationwide, I think their declared profit is something like 0.2% of all their deposits. That is wafer thin.

I still think interest rates are poor for savers even after allowing for mortgages. Shouldn't we be able to get an idea what a fair interest rate for lenders and borrowers from the P2P systems? I understand default rates can be as low as 1%

With funding circle, the average rate of return for lenders is 5.7% after fees and bad debt. One can explain low rates on current accounts due to all the costs of administrating payments and cash etc, what is more difficult to explain is why long term savings rates are so low.

ses6jwg

People who cannot manage their money currently subsidise those who can.

I read an article recently that said something like 60% of all money made from current accounts came from these charges.

rb10

cepheus wrote: »

I still think interest rates are poor for savers even after allowing for mortgages. Shouldn't we be able to get an idea what a fair interest rate for lenders and borrowers from the P2P systems? I understand default rates can be as low as 1%

With funding circle, the average rate of return for lenders is 5.7% after fees and bad debt. One can explain low rates on current accounts due to all the costs of administrating payments and cash etc, what is more difficult to explain is why long term savings rates are so low.

It depends on your attitude to risk.

If you lend money through one of these lending websites, it's being lent out on unsecured loans. So whilst the rate charged to the borrower is higher (and thus also the rate that you receive), there is greater risk involved.

However, the majority of a bank's lending is on secured loans (i.e. mortgages). They have a lower cost to the borrower, and so also a lower return to you. But, on the plus side, they are significantly safer, due to the much lower arrears rates.

coastline

The longer term picture looks like this...base rates higher than inflation...but now savers are paying for the world slump.