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The end of free banking... It'll never happen!


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It's also not free because the amount of interest they pay you in credit is below the rate of inflation. They are effectively still charging for the account at a rate of 1-(credit interest/inflation), as while you still have the same amount of money in numeric terms, this year's pounds are worth less than last year's. The bank swallows that value in exchange for the banking facility.

HSBCLloyds TSBcontractual interestNew Tax Creditscoming for you?NTL/Virgin Media

 

Never give in ... Never yield to force; never yield to the apparently overwhelming might of the enemy. Churchill, 1941

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It's also not free because the amount of interest they pay you in credit is below the rate of inflation. They are effectively still charging for the account at a rate of 1-(credit interest/inflation), as while you still have the same amount of money in numeric terms, this year's pounds are worth less than last year's. The bank swallows that value in exchange for the banking facility.

 

Absolutely right.

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It would seem that the people who are advocating that the abolishment of punative penalty charges are under the opinion that it would end the (so called) free banking regime. Well heres my take on it.

The majority of charges arn`t being accrued by people who are attempting ro rip the banks off or commiting fraud, its the financialy challenged and the people who for one reason or another have short term cash flow problems on a regular basis. For this these people should (according to the free banking advocates) subsidise the more fortunate customers. The banks also work this way and target the ones in this position as i found out to my expense this week.

Assume now that every customer got their finances sorted and the banks couldnt impose charges, would this also mean the end of free banking or maybe go the other way and charge the customers with say in excess £50000 a fee of £30 per month to keep the free banking for the rest of us. What an uproar there would be if they tried that.

I just wish they would play fair all way round.

My experience this week was that i was going to be £20 short for a DD. Phoned the bank to ask if they would pay it and was told no prbs, we will do a credit search that will show up to future lenders effectively giving me no option but to refuse. All this for £20 over 1.5 days so now im stuck with a £30 charge again.

Maybe a customer needed another bottle of bubbly and so i had to pay.

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  • 2 months later...

Well isn't it useful here to look at credit cards?

 

One minute the OFT lays down the amount of £12 (not saying this is a reasonalbe charge, merely the amount they set down to benefit consumer's now). As far as I am aware the majority of credit card companies now charge the £12. However I know the APR on the MBNA card I never u has gone up substantially (approx 7%!).

 

If you take away something which generates revenue then financial institutions are going to try to make up the shortfall from somewhere else. Note I'm defending the charges rather I'm looking rationally at the way such insititutions work.

 

The big danger of removing the charges is that the people who are likely to be charged to have a bank account are those with the least ability to pay.

 

It's a tough call.

The views I express here are mere speculation based on my experience. I am not qualified nor insured to give legal advice and any action you take will be at your own risk.

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Well isn't it useful here to look at credit cards?

 

I don't think so. The credit card industry has found that customers will accept huge interest charges, so it charges huge amounts of interest. (Seriously: 15-30%; we'd all have no trouble funding our pensions if we used the funds to set up credit unions and advanced each other loans at 12%.)

 

The thing to remember is that banks and credit card companies make money from transactions. Every time you use a debit card to buy from a trader, the trader pays a fee, of which your bank gets a cut. Every time there is a direct debit paid from your account, the receiver of the money pays a fee, of which your bank gets a cut. Every time you use your credit card to buy something, the trader pays the credit card company a percentage.

 

If your bank wants to keep getting this income, it needs to have your account. That's why banks offer free banking ... they make money out of it. They don't do it out of the goodness of their hearts!

 

Tim

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Free banking is an illusion. Most people pay their bank interest on the money in their current account when they are in credit, currently at a rate of around 2.6%.

HSBCLloyds TSBcontractual interestNew Tax Creditscoming for you?NTL/Virgin Media

 

Never give in ... Never yield to force; never yield to the apparently overwhelming might of the enemy. Churchill, 1941

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The big danger of removing the charges is that the people who are likely to be charged to have a bank account are those with the least ability to pay.

 

It's a tough call.

Well sorry to have to disagree here but the banks should not be charging these extortionate charges anyway and as already pointed out those who are being charged are those who can least afford it. if you had plenty of money in your account you wouldn't have to worry about bank charges.

 

it makes me sick to think that the banks can just switch the source of their revenue IE moving from bank charges to high interest rates. We should have a government in place with more clout which also puts a cap on the amount of interest that can be charged. This issue is only going to get bigger as debt in this country grows.

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The problem with an interest cap is that all the banks will suddenly move to that precise capped rate, regardless of whether or not it is above or below their current rate. Those above the cap will reduce it to comply, and those below it will treat it as licence to increase.

HSBCLloyds TSBcontractual interestNew Tax Creditscoming for you?NTL/Virgin Media

 

Never give in ... Never yield to force; never yield to the apparently overwhelming might of the enemy. Churchill, 1941

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  • 1 month later...

IS this a bump?

 

Yes it is, I just thought this thread could come alive agian thanks to the input from Nationwide's incoming CEO Graham Beale. He's basically said that Nationwide uses the money from penalty charges to pay for the bank accounts of people who never go over the limit. As near as we've got to somebody admitting that the charges are in fact unlawful.

The views I express here are mere speculation based on my experience. I am not qualified nor insured to give legal advice and any action you take will be at your own risk.

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and what exactly is he paying those who have accounts in credit?

quite low intrest on current accounts

They make large gains by borrowing from japan ( that only recently increased its rate from 0%) and leaning it on loans of 5% upwards so you can see that if they gain such a large profit from that alone

any one who is in credit should be doing this also via stoozing

I am sure anyone working in the overnight money lending exchange could tell you of the amount that can be made overnight if well beyond mosts imagination.

They make money from your acounts sitting with them and also the length of time a cheque takes to clear is an opertunity to lend at a very high rate for a short time

where they make thier mony will never be told to you as they want that kept very secret

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  • 1 month later...

FlexAccount pays 4.25% when you credit more than £1,000 in per month. over £500-999 per month you get 1.25%. Below that .25%.

 

I am, unfortunately, not familiar with the way Nationwide raises funds but I do not believe I've seen any mention made of Japan. I know there was recently a deal to raise money from markets in America. Perhaps the bigger banks have better systems for raising cash.

 

I do agree there is no reason for fee based banking, save the banks greed, and lets face it who's going to shed a tear for them?

 

The thing is though I can see, to a tiny extent, where they are coming from. There are people who conduct thier business in extremely inefficient ways, both from thier point of view and the banks.

 

I agree there are many many things you NEED or may prefer to pop to the branch to sort but personally I couldn't be bothered to stand in a long queue to pay in one cheque for a very small amount. Yes folks people do do it every single day!!!!

 

Just my pet peeve. I know it's rich coming from somebody who works for a financial institution but hey it's a free country.

 

On the subject of cheques there are pros and cons, assuming the bank charges thing is sorted, if cheques clear quicker then there is a negative for consumers. I can recall in my student days paying by cheque being a VERY handy way of stratching the monthly pay packet. If they cleared very quickly I would've struggled a lot more.

 

BTW isn't that an idea? Pay for stuff by cheque and you'll get a little more interest.

 

Unfortunately certain organisations seem to be trying to do away with cheques boo!

The views I express here are mere speculation based on my experience. I am not qualified nor insured to give legal advice and any action you take will be at your own risk.

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Guest louis wu

Why is it that 'free banking' still gets talked about.

 

Yes, for those who never go overdrawn, and never incur charges, its free, but apart from those very few people, its anything but free.

 

With the amount of money the banks 'earn' from charges, then the term free banking was just spun into existance, and its only within the last year that a few of us (and yes, we are still only a few) have become aware and questioned it.

 

Yes, some of the things the banks currently do will change, but a leopard doesn't change its spots, and they WILL continue to make billions every year, and its the so called customers that will supply that profit.

 

Louis

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BTW isn't that an idea? Pay for stuff by cheque and you'll get a little more interest.

 

We can dream :)

 

At least some are thinking about paying the interest on cheques you receive during the clearing cycle if they subsequently clear (Lloyds have actually put it into action). Now to get them to stop deducting interest on cheques you send as soon as they are presented.

 

Yes, for those who never go overdrawn, and never incur charges, its free, but apart from those very few people, its anything but free.

 

It's not even free for them, as you'd know if you'd actually read the thread before posting ;-)

HSBCLloyds TSBcontractual interestNew Tax Creditscoming for you?NTL/Virgin Media

 

Never give in ... Never yield to force; never yield to the apparently overwhelming might of the enemy. Churchill, 1941

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Guest louis wu

I was not entering the discusion with regards to the interest you recieve on your current a/c, after all there are many 'higher interest' current accounts available. Or the lets all become money brokers thread (no sarcasm intended, but thats just not in the real world for most people, and if banks want to do it, then fair play to them)

 

I was talking about 'fee based accounts', along with the majority of the other posts on this thread. You must concede that charges are a significant source of income for the banks, and most people fall foul of them from time to time.

 

So please, save your 'read the thread' line for someone who hasn't, or am I only allowed to comment on the things you want me to?

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I was talking about 'fee based accounts', along with the majority of the other posts on this thread. You must concede that charges are a significant source of income for the banks, and most people fall foul of them from time to time.

 

Indeed they are, but you can't deal with the issue of "free banking" without taking credit interest and inflation into account, since for most people it is still a hidden "cost" of holding the account. If the banks move to a monthly fee, they will still swallow the entire inflationary value of your money, Because They Can™.

HSBCLloyds TSBcontractual interestNew Tax Creditscoming for you?NTL/Virgin Media

 

Never give in ... Never yield to force; never yield to the apparently overwhelming might of the enemy. Churchill, 1941

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Guest louis wu

Fair point, but that wasn't the point of the original post, and the next 26 posts after that, that was specifically to do with the industry term of 'free banking'.

 

IMO the interest/inflation situation is already considerably better than it was 10 years ago, with an 'interest war' being raged by some high street and internet banks.

 

 

Quote from original post by thegoodsamaritan

 

 

The banks all seem to want to scare us with quotes like "well if we don't charge for unpaid direct debits etc then it will mean an end to free banking in this country"

 

 

I know it may sound silly, but I just wanted to talk about the statement that thegoodsamaritan began this thread with:). If you want to discuss interest/inflation, then maybe consider starting a new thread, I am sure people would be happy to debate this.

 

Louis

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By the way, a colleague recently remarked that he paid fees for his current account; I asked why, and he said he thouht everyone did ... he'd paid for many years.

 

He was surprised to learn that banks offered free bank accounts ...

 

Tim

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  • 1 month later...
By the way, a colleague recently remarked that he paid fees for his current account; I asked why, and he said he thought everyone did ... he'd paid for many years.

 

He was surprised to learn that banks offered free bank accounts ...

 

Tim

 

Many years ago the banks did charge for personal banking. They charged, for example, for every cheque that you wrote. Now, it is the case that banks have never liked personal accounts unless they belong to the wealthy. The reasons are simple - if you don't have much money passing through your account and you make multiple transactions (whatever they are) then the bank incurs costs and those costs are not offset by the notional interest that they are earning on your money.

 

We may not like this. We may think it's wrong. But it's simply a fact of life.

 

It's also the case that they are starting to do exactly the same now - except they don't do it for cheques they do it for debit cards. And they aren't charging the customer, they are now charging the place where the debit card is used. You may have noticed that there is now a policy of not taking cheques at many large stores - Tesco, Boots and ASDA spring to mind.

 

You may also remember that some years ago some credit card companies starting charging an annual fee for cards. They lost out because users told them that they'd move if the fee wasn't waived. They spent more time and effort on individual waivers than they made in charges - so they basically stopped. However, they are now starting up again.

 

Some banks do charge for accounts. For example Citibank's equivalent of a current account carries a monthly fee. Are they bothered if people move away? Not at all. Because the majority of people don't change bank accounts - ever. That's why banks go after student business so heavily. They know that about 2/3rds of all the students they get as first time customers will still be customers when they die. It's another simple fact of life.

 

Banks make most of their money from investments. There is a certain amount of money that they can use because it's held by them in individual bank accounts. But this is a very small amount compared to the amounts they have from institutional investors. And the amount of work they have to do to look after individual accounts is comparatively more than that expended on looking after large corporate accounts.

 

So, yes the banks will introduce charges. They will use the argument about the offset of 'fees' to justify their position. It's a lie - but they'll use it. I predict that they may not charge a flat fee for having an account but they will start charging for itemised services such as £1 per cheque or 50p for a standing order.

 

By the way - I don't (currently) work for a bank. I can count a number of banks among my past clients both here and abroad and I do have a fairly up to date knowledge of most of the aspects of the business.

PhiltheBear

 

Lloyds TSB - At the Sign of Flogging a Dead Horse

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... The reasons are simple - if you don't have much money passing through your account and you make multiple transactions (whatever they are) then the bank incurs costs and those costs are not offset by the notional interest that they are earning on your money.

 

We may not like this. We may think it's wrong. But it's simply a fact of life.

...

 

I don't believe that's correct; I think it ignores the fact that banks charge businesses for each transaction, and also cross charge each other.

 

So, if you use your debit card to make a purchase from a shop, the shop's bank will charge the shop a transaction fee. And I believe the shop's bank will pay your bank part of that transaction fee. The fees are much higher than the costs ... as much as 20p per transaction.

 

And so, far from being a cost to banks, transactions on current accounts are a source of revenue.

 

Tim

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I don't believe that's correct; I think it ignores the fact that banks charge businesses for each transaction, and also cross charge each other.

 

Which makes makes as much difference as urinating in the ocean. I charge you 20p, you charge me 20p, volume of transactions means the banks work out roughly even on these. Which takes us to ...

 

And so, far from being a cost to banks, transactions on current accounts are a source of revenue.

 

Exactly. Playing with money is what they do - it's the real service they provide under it all. Taking all the money deposited with them, using it to do things like making sure when you ask them for £20 that they have £20 somewhere handy to give you, funding mortgages and business loans in a climate of low interest rates that brings high multipliers, generally fulfilling various functions without which the economy would fail (spectacularly and massively so). It's a service they provide, so it's money they raise.

 

Free transactions on personal accounts is a loss leader. Every penny is recouped from more profitable services such as mortgages (on which they make a metric shedload of money).

HSBCLloyds TSBcontractual interestNew Tax Creditscoming for you?NTL/Virgin Media

 

Never give in ... Never yield to force; never yield to the apparently overwhelming might of the enemy. Churchill, 1941

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I don't believe that's correct; I think it ignores the fact that banks charge businesses for each transaction, and also cross charge each other.

 

So, if you use your debit card to make a purchase from a shop, the shop's bank will charge the shop a transaction fee. And I believe the shop's bank will pay your bank part of that transaction fee. The fees are much higher than the costs ... as much as 20p per transaction.

 

And so, far from being a cost to banks, transactions on current accounts are a source of revenue.

 

Tim

 

The way is works is like this - You pay your shop using a debit or credit card.

 

Your shop uses an 'acquirer' which is a company (usually but not always) owned by a bank. The shop pays a fee, either a fixed amount (debit card) or a percentage (credit card) to the acquirer for processing the payment. This is deducted from the payment you made. This fee is split between the acquirer and the card issuer.

 

The acquirer passes the charge on to the card issuer. The card issuer makes the payment, on your behalf, via the acquirer into the shop's bank account directly.

 

That very much simplifies it - but, in the UK, that's how it works. (The whole transactional sequence is much longer but you'd lose the will to live if I explained it all :) ). In almost all other countries the acquirers are banks. Here they tend to be bank subsidiaries but not all of them are.

 

There can also be other parties involved. For example, via one of my websites I have an ecommerce shop and a company that provides the interface between the shop and the acquirer. These may charge direct processing fees per transaction as well.

 

Your bank - paying out - collects its fee as a card issuer. The shop's bank doesn't charge anything - it just receives the remainder of the money.

PhiltheBear

 

Lloyds TSB - At the Sign of Flogging a Dead Horse

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Which makes makes as much difference as urinating in the ocean. I charge you 20p, you charge me 20p, volume of transactions means the banks work out roughly even on these.

 

...

 

Free transactions on personal accounts is a loss leader. Every penny is recouped from more profitable services such as mortgages (on which they make a metric shedload of money).

 

No.

 

When you use your personal account debit card to buy something from a shop, your bank is paid a fee. The fee is greater than the cost to your bank.

 

And so your bank makes money out of your use of your personal account.

 

So free transactions on personal accounts are not "loss leaders", but revenue earners.

 

Tim

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  • 7 months later...

Hmm, according to this bank employee, one of the major banks has done the number crunching to see what difference there would have been if his employers had not charged any penalties, but instead charged for accounts on their existing "pay accounts" tarriffs.

The post right after asks some interesting questions..

MoneySavingExpert.com Forums - View Single Post - Why a bank charges win doesn’t mean the end of ‘free banking’ blog discussion

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