Why they're banking on you staying

[Legal Beagles]

There is good reason to search for a better deal, writes Paul Farrow.

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[Amethyst]

Re: Why they're banking on you staying

I never used to have a problem with my bank. After all, I banked with one of the most prestigious private banks in the world, Coutts. The 315-year-old Queen's bank prides itself on customer service and I once carried one of its leather wallets embossed with its three crowns logo and had one of its uniquely sized cheque books.
Not that I was stinking rich and met its then £500,000 of liquid wealth criteria. Far from it. No, I was one of the frock-coated minions delivering the personal service that was expected of a Coutts bank clerk – and one of the conditions of employment was that I had to bank with Coutts (albeit with a branch solely set up for employees). Never let a phone ring more than three times, dictate personal letters for our branch managers to sign (your seasonal greetings are heartily reciprocated, yours, David, is entrenched on my memory some 20 years on) and manually folding statements into envelopes were just some of my duties.

So too was calling a customer if it looked as though they would be going over their overdraft limit. Not so they could do something about it themselves, but to ask if they would like us to transfer some money from another account for them so they wouldn't incur extra charges.

Naturally, it was a shock to the system when I left the bank and hot-footed my way to one of the big four high street banks to sign up. I suddenly became just a number and there was no speaking to a clerk directly and asking for a couple of days leeway until I got paid.

Since then I have been left frustrated on the end of the phone, suffered the odd penalty payment after inadvertently going overdrawn and have put up with poor savings rates. But like most of us I haven't switched bank accounts.

More fool me. The banking landscape has changed in the past decade and the big four – Barclays, HSBC, Lloyds TSB and Natwest – have been forced to counter competition from the likes of Halifax, Alliance & Leicester and First Direct. They have upped the ante and while the banking community is defending itself against the Office of Fair Trading in the courts over penalty fees, many are still after your business.

HSBC and A&L are a couple that are enticing would-be customers with seemingly mouth-watering rates of interest. But you have to be careful of promotional whims.
A rate of 8 per cent plus certainly catches the eye but it is on offer only for a certain period. It wasn't so long that Lloyds TSB boasted that it would pay interest on cheques from the moment they were paid in, rather than from when they cleared – which typically takes up to four working days.

On the face of it, "instant'' interest looked a great deal but, in fact, the benefit was almost pointless – the maximum annual benefit was a little over a fiver.
Besides, most of the big four's customers aren't getting a sniff of the good deals. The vast majority of HSBC's 8.6m customers don't get anywhere 8.5 per cent interest on their current account – they have the standard account which pays 0.1 per cent and 18.8 per cent on its authorised overdrafts.

Likewise, Lloyds TSB Classic Plus account may pay a best-buy 4.17 per cent , yet the majority of its customers have a Classic account which pays 0.1 per cent . The 19.3 per cent authorised overdraft rate is among the highest.

Meanwhile, A&L customers have to pay a fee to use their overdraft. But the problem is that banks rely on people like me – those who cannot be bothered to switch. There is good reason to search for a better deal but don't fall for headline rates alone.

Eighteen months ago, First Direct came under fire for charging customers £10 a month unless they deposit or maintain a balance of at least £1,500 a month in their current account. It raised overdraft rates and also scrapped in-credit interest on its current accounts.

Yet it tops survey after survey because of its superior customer service – the BBC's Watchdog this week being the latest. Perhaps, John Campbell, the young Scot behind Coutts was on to something in 1692 with his concept of the personal touch. Most banks choose to ignore it, but that doesn't mean you should turn a blind eye – you can always move on.

An option for the nervous
The annual Barclays Equity Gilt Study makes for sobering reading. The 10-year return from equities was the worst since the decade 1967-77, while cash was the best performing asset last year.

It goes on to say that we face a future of inflation, higher interest rates, lower house and share prices and economic instability.

Sounds grim doesn't it? But on the plus side, the chances of equities under-performing cash for two consecutive years is 33 per cent – so the odds are in your favour for next year. Hold on to shares for 10 years and the probability that you will beat cash is 99 per cent.

The study also highlights the importance of the reinvestment of dividends. It is a point that cannot be emphasised enough. Their reinvestment helps to beat the ravages of inflation which are once again lurking around the corner. An outlay of £100 in 1899 would be worth just £209 in real terms today compared to £25,277 with dividends

. But even going back five years, the power of the dividend can be proved. The total return from the FTSE 100 in the five years to December 30 2007 was 100.9 per cent ; with dividends stripped out it was 69.1 per cent . It is why equity income funds are worth considering as they aim to deliver a growing income stream – and there is a plethora of experienced fund managers in the sector. On the other hand, you may think a 33 per cent chance of underperformance is too big a gamble to take.
Which leads me back to my Coutts days. While I worked at its City office I looked after customers who had money-market accounts. This is where wealthy individuals were able to park their hard-earned cash overnight, on seven days' or a month's notice. These institutional-style accounts often paid higher rates of interest than your local building society.

I hadn't given money markets a moment's thought until I came across a chap from Deutsche Bank talking about exchange-traded funds. Deutsche is launching an ETF that basically tracks the sterling overnight interest rate. Naturally the rate will move up and down, but at the moment its pays about 5.3 per cent . The quirk is that it qualifies as an equity Isa, rather than a cash Isa. So you could plough in this year's full allowance of £7,000 in cash, if you have a self select Isa. Sounds like an option for nervous investors to consider.