Should we really challenge bank charges?
“So how many times a month can I use the account for free,” I asked the clerk helping me open my first British bank account several years ago. “As many as you like,” she replied, seemingly confused by my question. “And how much does it cost if I take money out of another bank’s cash machine?” I asked. “Nothing,” she replied with another quizzical glance.
My husband and I left the bank wondering if she knew what she was talking about. It seemed that we didn’t have to pay for any of the services provided and, having just moved to the UK, it looked too good to be true. Back home in Australia, we had to pay monthly account-keeping fees, the number of free transactions was restricted, and using an ATM that didn’t belong to our bank cost $2.00 (85p).
Credit cards came with annual fees, while cheque books and even cashing cheques incurred a fee. If you lost or damaged your card, you had to pay for that too. In short, nothing was free, but here it seemed as if everything was.
Fast-forward seven years and I’m well and truly attached to free banking (or free in-credit banking, to describe it more accurately). But, according to some, free banking may be on its way out if the banks are forced to back down on the long-running dispute over overdraft fees.
The Office of Fair Trading (OFT) and even of Britain’s biggest banks – plus the Nationwide Building Society – are currently in court battling out the issue of overdraft fees and whether they are fair. The OFT wants the right to stop the banks levying these, often heavy, fines at customers who go into the red without prior consent.
While the High Court deliberates the issue, all cases being heard by County Courts have been put on hold, and refunds have been frozen.
Since the consumer revolt over overdraft fees began, banks have been dropping hints that a win for those stung by overdraft fees will be a loss for the consumer in general.
It is estimated the banks earn up to £3.5 billion a year from penalty charges and, if banks lose this income stream, they will look to other areas to recoup the loss. Earlier in 2008, HSBC said it expected to pay back a further £300 million if the OFT decision went against it.
Derek French, director of the Campaign for Community Banking, estimates that the big banks stand to lose about £1 billion a year in revenues if they are forced to drastically reduce unauthorised overdraft fees.
“These fees can be as much as £38 a time and the feeling is that they might have to come down to about £15,” he explains. “The banks have got to make up the income from somewhere. They have been dropping hints for quite some time that, if the public wins on the penalty charges, then the downside of that is that charges for all may return.”
Ready for change
Already banks seem to be sneaking in a few changes to their current accounts – Barclays has stopped paying credit interest on its free accounts and HSBC has announced it will follow suit in December 2008. First Direct now charges a monthly fee of £10 for any customer who doesn’t pay in or maintain a balance of at least £1,500 each month, and many banks are pushing customers to switch from free accounts to added-value fee-charging accounts, which offer extras like travel insurance.
While I may feel the odd pang of homesickness when I think of Australia, it’s certainly not for its banks. Having also spent time living in Canada, where I had a bank account which allowed just four free transactions each month, I don’t think Brits realise what it will be like if they lose access to free accounts.
French agrees. “The fact remains that we’ve had so-called free banking in this country for a very long time and whole generations have grown up expecting the basic services for free,” he says.
While overdraft fees might seem excessive, they are avoidable – the charges for having a current account or credit card in many other countries are not. An OFT report released in July found that the UK’s free-in-credit model was uncommon.
A report commissioned by the British Bankers’ Association found that the UK was one of the cheapest and most transparent countries to bank among the 11 countries assessed by independent economics consultancy Oxera.
This often becomes apparent to Brits only after they’ve had to bank elsewhere. Matthew Powell, from Essex, found the banks rather restrictive when he moved to Canada in 2004. He chose the cheapest current account on offer, but was only allowed a limited number of transactions a month. “It’s a little niggling,” he says. “As well as transactions, many banks charge C$20 for a cheque book so I went without. There’s also a charge of $1.50 or so for using another bank’s cash machine.”
Being able to use a NatWest card in an Abbey machine without penalty is something that’s taken for granted in this country, but it would be a rare luxury overseas. Camille Clowery, a US citizen who lived in the UK during 2003, says looking for an ATM operated by your own bank can be a real inconvenience.
“The worst thing about banking in the US is the ATM fees. In the UK I had an HSBC account and never paid any ATM fees. Here fees for not using your own bank’s ATM range from $1.75 to $3,” she explains. “No one wants to carry around hundreds of dollars at a time, so it really adds up when you get money from the ATM twice a week. You are definitely lucky over there to get everything for free.”
Fees, fees, fees
Monthly account-keeping fees are another bone of contention. Ben Stevens, an Australian who moved to the UK four years ago, says he pays to keep his Australian account open. “I still keep an account as I will only be in the UK for a few years, I visit Australia regularly and am somewhat apprehensive about closing an account only to open it again in the post-9/11, security-conscious banking world,” he explains. “I do hate how those greedy banks extract $5 administration fees every month from my savings account when I have only used it half a dozen times in the past four years. I’m now seeing my funds diminish through no fault of my own.”
Transaction limits can also be difficult to keep track of, fellow Australian ex-pat Katherine James recalls. “With some accounts, you had a limit of four transactions a month. Any more than that and they’d charge you about $4 per transaction,” she explains. “You couldn’t always remember how many transactions you’d made. There was no transaction tally on receipts, so you’d just have to try and remember. The transaction limit didn’t carry over to the next month either, so if you only made two transactions in the month, the remaining two didn’t get added on to your next month’s transaction allowance. It was stupid!”
Overseas banks will often waive monthly fees if you take out a mortgage or savings account with them, but this can mean you’re losing the opportunity to get the most competitive interest rates on your savings or loans.
And, as Helen Foster, who moved to New Zealand in 2001, found, it doesn’t mean you’re exempt from other charges. “I still have to pay for things, like $1.50 for a new chequebook, which annoys me, as I’m already paying interest on a loan which makes them money, plus they have my savings to invest,” she says. “The thing that confuses me though, is that to transfer money between my accounts online costs $1 a transaction – if I do it in the branch it’s only 65 cents.”
Some in the UK have argued that adopting banking charges would be the fairer option. They say UK banks are making a large part of their fee income from penalty fees imposed on people who often can’t afford it and that these people are subsidising free banking for the rest of us.
That said, research from MoneyExpert.com found that 58% of people were not prepared to pay for a bank account, even if it did lead to a fairer system.
It’s also worth noting that, in countries with fees for all, there are also costs for going overdrawn, or it simply isn’t possible to go into the red. Also, as account-keeping fees and the like are often waived, if you keep a significant sum in your account, this system is even more disadvantageous to those on low incomes. While it is possible to avoid overdraft fees by managing your finances, it may not be possible to pay in or maintain a certain amount as many people simply don’t earn enough to do so. So those who earn less could still end up subsidising those who have more.
Meanwhile, all of us could find ourselves trekking extra miles to find the right ATM, struggling to remember how many transactions we’ve made in the past month and reading with anguish our monthly statements detailing everything we’re now being charged for (including, probably, being sent that statement).
Put like that, surely being charged for occasionally going into the red doesn’t seem quite so bad.
The grass isn’t always greener:
Arranged overdrafts are rarely available, but many banks offer overdraft protection plans – this means they will pay out when a customers makes a transaction that they don’t have the funds for, but will charge them about $35 for each transaction.
Most customers are able to access free bank accounts in the US, often by opening an associated savings or mortgage account. However they still have to pay for cheques and ATM withdrawals at other banks.
Most European banks provide current accounts that either charge monthly fees or impose transaction limits. The Oxera report found that Italy and Germany were particularly expensive in this regard, with Italians paying an average of €85 a year in annual fees. Credit cards are not as widespread as in the UK, and are more expensive to operate for those who pay the balance off in full each month.
The land down under scored poorly in Oxera’s report in virtually all categories. Some free accounts are on offer with very limited transaction allowances, but most banks charge monthly fees, although the fee could be waived if you deposit between $3,500 and $5,000 a month. Charges often apply to services such as cashing cheques, paying bills, using telephone banking, requesting a statement or transaction verification, and even sometimes for “staff-assisted transactions” (ie. going into the bank).
Cash machines charge about $2 if they are in a different bank’s network. Most credit cards come with annual fees and unauthorised overdraft penalties can run to $50.
Canadian banks offer a range of bank accounts that charge varying monthly fees, depending on transaction limits and balances held on account. Typically, consumers pay about $0.65 to $1 for additional transactions and $1.50 – $5.00 for using another bank’s cash machine. Administration fees can be charged for services such as verifying transactions, closing accounts, providing mini-statements and processing cheques. It is difficult to transfer funds between accounts at different financial institutions. Most credit cards have annual fees.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.