Banks generate extra £624 million from increased rates

It seems 2006 has been a busy year for banks, in the last 12 months consumers have been hit with a barrage of increased interest rates and charges.

New analysis from price comparison and switching website uSwitch.com has calculated that banks generated an additional £624 million in revenue last year alone by increasing authorised overdraft rates and credit card purchase APRs. This figure will continue to grow, with further authorised overdraft rate increases from Lloyds TSB and The Royal Bank of Scotland coming into effect this month. These changes are expected to generate an additional £18.5 million in revenue over the next year.

Current Accounts

In December, the BBC’s Money Programme estimated that it only costs a maximum of £4.50 to deal with any default charge on a current account as opposed to the average £30 currently being charged. This allegation, compounded by the fact that the BBC’s Money Programme also estimated that over 150 people a week are succeeding in getting their bank charges refunded by complaining to the Financial Ombudsman Service, (in most cases the Ombudsman has ruled a charge of more than £12 is unfair) has served to reinforce the argument that the current levels of charges being levied on customers by the banks are “unfair”. If current account default charges are reduced from an average £30 to £4.50, the banks are anticipated to make a loss of £1.1 billion a year. Therefore it comes as no surprise to find that several banks announced an increase in overdraft rates in 2006, taking the average authorised overdraft rate from 13.80% to 15.08%.

To add insult to injury, overdraft buffers, which establish a set limit allowing customers to have an unauthorised overdraft without incurring bank charges, are slowly disappearing. They have already been axed by Lloyds and Yorkshire Bank and reduced by Alliance and Leicester and Intelligent Finance.

Credit Cards

The Office of Fair Trading (OFT) ruling in April 2006 to limit penalty fees on credit cards to £12 has meant that credit card providers have sought alternative routes to recoup lost profits, estimated at £300 million. In 2006, the industry increased purchase APRs by an average 1.18% APR, generating an estimated £567 million this is just one of many changes used to generate additional revenue. Since the intervention of the OFT in April last year, the credit card industry has made a succession of changes such as:

Removing the cap from balance transfer fees
Increasing the actual balance transfer fee
Changing the order of repayments
Increasing cash interest rates
Increasing cash advance fees
Increasing the standard purchase APR

Credit card balance transfer fees are now accepted as the norm. Some providers charge as much as 3% of the balance transfer sum and every provider has removed the maximum cap on this amount. Limited offers are available from providers, such as Clydesdale or Yorkshire Bank, which allow customers to transfer balances without incurring a fee until the 28 February 2007. It would also appear that monthly fees on cards are set to make a return, with Co-operative setting the pace charging a £2 monthly fee on its Platinum Tracker Visa card.

Nick White, Director of Financial Services, at price comparison and switching website uSwitch.com said: “While the OFT’s crackdown on credit card charges and the impending investigation into current accounts could be seen by many as a clear victory for consumers, banks have been quick to find new methods of recovering lost profits from their customers.

“Consumers have been inundated with increased interest rates and charges over the course of 2006. However, banks will have to be careful about how they seek to make up for lost revenue streams as the increased publicity surrounding the possibility of winning money back has lead to banks being deluged with court claims. According to our calculations, the banks would stand to lose £5.7 billion in retrospective charges if all those customers who have been penalised with “unfair” charges claimed back the losses they have incurred over the past six years.

“2006 was a tough year for consumers who have had to be savvy to stay one step ahead of the banks and not get caught out by additional charges and higher rates of interest. It is clear that the traditional model for UK banking will be forced to change over the next few years as the threat of lower retail banking profit margins become a reality. In turn, we would expect banks to place an increased focus on products that offer higher returns and greater cross-sell opportunities, such as packaged accounts.”

White concludes: “2007 will also bring a new challenge for consumers to overcome as a major shake up of the £5.5 billion PPI industry is imminent. Even if there is no direct intervention by the OFT, the industry is likely to experience a negative impact on sales as consumers become more aware of the cheaper alternatives. This could fundamentally change the loans market, as sub-6% loans may no longer be sustainable without being subsidised by the highly profitable sale of PPI.

“Consumers will continue to be challenged by the banks, in order to stay one step ahead of the game in 2007 they must spend time searching as there are some great deals to be had. Alliance and Leicester’s Premier Direct Current Account offers the lowest authorised overdraft rate at 5.9% EAR and Barclay Card’s Simplicity Platinum Visa offers the lowest purchase APR at 6.8% APR.”