How do banks profit from paying switching fees?

Nebulous2

Banks may well be 'booking' a profit on people who switch, despite not making money from them.

I read an article on that in relation to Virgin money, which helped me to make sense of the long 0% deals on offer. I hope I can explain it, but apologies if I don't, I'm not an accountant!

Long-term investments may make a great deal of money towards the end of the term, but cost money in the initial years. That can be an active disincentive to investing as shareholders want to see profits. Accounting standards allow some of that projected profit to be taken now. So Virgin are showing a profit in their accounts for customers like me, who have a great deal of their money, interest free.

Carillion were doing something similar, which allowed them to continue paying dividends, despite being in trouble.

That may well work with conservative projections, where everything goes to plan, but aggressive assumptions and dramatic unexpected changes may mean companies.have taken profits that never happen.

binaryuniverse

RG2015 wrote: »

Yes, it is a loss leader but are you saying that Nationwide never charge anyone 5% or more plus fees for any financial product?

You could say the same about banks that offer an immediate bonus for switching. There's little difference, other than Nationwide having your money.

Quite simply, they can offer those products WITHOUT offering you cash incentives to join.