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MSE News: OFT to investigate current accounts

edited 30 November -1 at 1:00AM in Budgeting & Bank Accounts
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  • Say I deposit £10,000 into my bank and it pays me 3% AER. At the end of the year I will have earned £300 in interest. (ignoring here the tax I'd have to pay on this)

    Now the bank lend the same £10,000 I have deposited with them at 7% APR The bank make £700 in interest.

    So they have made a profit on my deposit of £400
  • pqrdefpqrdef Forumite
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    And my point is that it must be accepted that these services come at a cost to the bank and if you are not paying those costs then who is?
    All payments to businesses, charities etc by FP, SO, DD or card are charged (exorbitantly) at the other end - though of course businesses have to pass their banking costs on to the customer one way or another. It's artificial to separate business and personal markets, because without personal accounts, business accounts wouldn't generate so many transaction charges.

    Personal deposits and withdrawals and interpersonal payments are the only transactions that don't generate revenue for banks. And the marginal cost of electronic payments is negligible. Cash handling, mostly ATMs, costs a bit, though I don't doubt that the system pays for itself by encouraging more people to leave more money in the banks for longer.
    Or are you suggesting that credit balances on your current account at zero interest are paying for them?
    I believe the average current account balance is around £2000. This is invested, and I suggest the return on it is enough to cover marginal operating costs for accounts in credit.

    It worked for the late lamented National Girobank, which was just a payments operation that didn't cross-sell much and didn't intentionally lend.
    "It will take, five, 10, 15 years to get back to where we need to be. But it's no longer the individual banks that are in the wrong, it's the banking industry as a whole." - Steven Cooper, head of personal and business banking at Barclays, talking to Martin Lewis
  • pqrdefpqrdef Forumite
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    JuicyJesus wrote: »
    but saying that banks make money off of money deposited to them and you are therefore paying the amount of profit they generate from these activities is somewhat silly.
    It's not silly at all, it's what banks do.

    You can argue semantics about who's "paying", but the point is, the bank isn't looking after your money to do you a favour. It wants the use of your money, to which end, it offers services as an inducement.
    "It will take, five, 10, 15 years to get back to where we need to be. But it's no longer the individual banks that are in the wrong, it's the banking industry as a whole." - Steven Cooper, head of personal and business banking at Barclays, talking to Martin Lewis
  • innovateinnovate
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    So they have made a profit on my deposit of £400

    Minus tax they have to pay, and minus the costs they have as a business. Plus, they have to manage the risk that you withdraw/use your money anytime you like. I have not seen any published figures for gross profit margins for current accounts that are in credit but could imagine they would be quite low because they are typicaly high-transaction, high-cost accounts.

    Leaving the actual figures aside - - it is a fact that businesses in the western economies live (or die) by the amount of profit they make. If you demand that they should pass on all profit that you can claim as "having enabled", you'd soon be talking communism. Because if banks shouldn't make profit from you, why should your employer make any profit from your work? Why should a shop make profits because you buy something from them? etc etc. Nobody would ever go out of their way to do a bit extra because there's no longer any financial incentive for doing so. Don't know about you, but I wouldn't want to live in such a country.

    I am not advocating excessive profits, though. Or vast bonus payments for corrupt bankers. Banks should be encouraged to pay a half-decent interest rate for all current accounts. As Lloyds and Santander, and Halifax to some extent, demonstrate, it is possible to offer current account customers a bit of interest. Not that this has created a mass-defection from other banks - - so the vast majority of people seem to be perfectly happy with getting zilch interest on their current accounts.
  • JimmyTheWigJimmyTheWig Forumite
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    So the choice is avoid using a overdaft and going overdrawn to pay charges. stay in credit. Then everyone will have free banking.
    That would be the sure way to end so-called free banking.
    Would be like when RyanAir used to not charge a fee for Visa Electron. Some people argued if everyone got a Visa Electron they could avoid RyanAir's fees.
    "Too many" people started getting Electron cards to pay for RyanAir flights and so RyanAir changed the rules.

    If no-one went overdrawn the banks would move to a different model to fund their current accounts.
  • ConsumeristConsumerist Forumite
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    pqrdef wrote: »
    It's not silly at all, it's what banks do.
    I think you may have missed the point.

    We know banks make money from our current account credit balances but I agree with Juicy Jesus that it is silly to suggest that the money banks make from those credits is a cost to the customer.
    >:)Warning: In the kingdom of the blind, the one-eyed man is king.
  • ConsumeristConsumerist Forumite
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    If no-one went overdrawn the banks would move to a different model to fund their current accounts.
    Do you mean something like a "fair banking" model. You know, use the difference between savings rates and lending rates to fund banking costs.

    Crikey, what sort of silly idea would that be? :rotfl:
    >:)Warning: In the kingdom of the blind, the one-eyed man is king.
  • datostardatostar Forumite
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    I think you may have missed the point.

    We know banks make money from our current account credit balances but I agree with Juicy Jesus that it is silly to suggest that the money banks make from those credits is a cost to the customer.

    Economists call this 'Opportunity Cost'. By placing your resources in a non-earning environment you are forgoing the opportunity of generating profit by placing them elsewhere. However, the profit forgone in these circumstances is actually buying a service, i.e. free banking. Many people obviously think that is a good return.
  • JimmyTheWigJimmyTheWig Forumite
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    Do you mean something like a "fair banking" model. You know, use the difference between savings rates and lending rates to fund banking costs.

    Crikey, what sort of silly idea would that be? :rotfl:
    That would be ideal, if it worked.
    Whether that would generate enough money for the banks to be able to run current accounts I don't know.
  • innovateinnovate
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    That would be ideal, if it worked.

    It would probably mean we'd be getting even more abysmal interest for our savings, and would have to pay a lot more for overdrafts, loans and mortgages.
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