Bank charges, ifs buts and maybes
Andrew Hagger of Moneynet.co.uk looks at the possibilities for current account customers ahead of the Supreme Court ruling tomorrow.
The Supreme Court is due to announce its decision tomorrow, more than 850 days after the banks and OFT first decided to go to court to establish the law on unarranged overdraft charges.
This unwelcome shadow has been hanging over banking industry for far too long, mainly down to a stubborn reluctance to give up this lucrative but highly controversial revenue stream.
Even if the Supreme Court rules against the banks, we'll still have to wait for the outcome of the OFT investigation into the fairness of the charges. However this piece of work has been running in parallel and is expected to be concluded in the next few weeks.
The numbers
The OFT market study of personal current accounts in 2006 estimated that the banking sector benefited from a combined annual revenue of £2.6billion from charges associated with unauthorised overdrafts.
If the OFT decides that the cap of £12 introduced for credit card fees in April 2006 will apply to current account charges then a conservative estimate would see this revenue stream fall to one third of previous levels at £860 million or an annual shortfall of just over £1.7 billion.
If it plumps for a figure lower than £12 then surely this would have a knock on effect for the credit card market as the cost of an unpaid item shouldn't be much different whether it's your bank account or your credit card.
The 2008 market study from the OFT, reported that there were 54 million active current accounts in the UK.
In simplistic terms, introducing a monthly fee of £2.50 (or £30 per year) for each of these accounts would generate £1.62 billion per year and so replace the lost unauthorised charges revenue.
It doesn't however account for the number of back dated claims for reimbursement of pending which reportedly could be as high as 8 million. As a result banks may look for even higher monthly fees or charges per transaction to cover this potentially colossal refund exercise.
Charging options
Moneynet research below highlights that an increasing number of current accounts (excluding basic bank accounts) charge a monthly fee, albeit the majority relate to packaged account products.
In October 2006 there were 24 out of 72 Current accounts that charged a fee (33%)
In October 2007 there were 30 out of 75 Current accounts that charged a fee (40%)
Now there are 37 out of 82 Current accounts that charge a fee (45%)
Moving forward, I think we could see a three tier account offering from the banks with a different set of account characteristics and charging levels for each.
LEVEL 1 - Basic Bank account (Free) - access to cash via cheque book and cash point card plus option to use direct debits/standing orders.
LEVEL 2 - Mainstream banking (Monthly fee up to £5?) - As per level 1 but with overdraft facilities, credit interest, debit card and online/mobile banking.
LEVEL 3 - Packaged/Premier banking (Monthly fee £10 - £30?)- as per level 2 but higher monthly fee to cover additional options such as travel cover, breakdown insurance, discounts etc.
It may even be that the banks introduce more complex tariffs based on a charge per entry or cash withdrawal although I'm sure most customers, if forced to pay a fee, would opt for a fixed monthly fee option.
Deals for loyal customers - are they really free?
The recent announcement from Santander to offer free banking to its mortgage customers is an innovative move and one that may become a blueprint within the industry. However you could still end up indirectly paying for your current account.
There's always the potential for the mortgage fee to be increased or perhaps the mortgage rate adjusted to cover the ‘free banking' costs. As an example if you had a £120k mortgage (25 years) and the interest rate was tweaked upwards by just 0.1%, you wouldn't think anything of it but your lender would benefit to the tune of around £7 per month.
The future
Whilst there are many cases of customers being severely punished with hefty fines taken from their account for genuine oversights or circumstances beyond their control, there are also other customers who have had no regard for their overdraft limit and have abused their banking facilities on a regular basis.
Unfortunately the latter will be in the queue for a refund along with anyone else that was charged and will inflate the cost to the banks which will undoubtedly be recouped by other means.
Whether it's fair or not, we may have to come to terms with having to pay for our banking, but if we do there will be increased expectations on levels of service and quality of products - neither of which I doubt will be forthcoming.