Banks rake in £2.5bn overdraft fees profit

[Shazzaw]

Banks rake in £2.5bn overdraft fees profit

Caroline Grant, Daily Mail
7 July 2008

Banks are making £2.5bn profit a year by charging customers who dip into unauthorised overdrafts.


The Office of Fair Trading is expected to reveal the figures later this month as Britons struggle to cope with the rising cost of living.
There have been hundreds of thousands of claims from people trying to get refunds on overdraft charges - which could see banks having to pay back almost £10bn.
Banks will be forced to reimburse their customers if the OFT wins a court case it is pursuing against them. Bank fees can be as high as £35 for a bounced payment.
The trading watchdog is preparing to release figures that will show for the first time how much banks make from charges on unauthorised overdrafts. The statistics will make up just one part of the OFT's review of the banking industry in a damning report.
An OFT spokesman confirmed the regulator is due to publish its findings later this month.
In the most recent court judgment against the banks, Mr Justice Smith made reference to OFT evidence on overdraft charges.
The OFT have been provided with figures that showed high street banks under investigation received a total of £2.5bn on an average daily unarranged overdraft total of £0.6bn.
Mr Justice Smith ruled in April that the courts are entitled to assess whether these charges are fair.
Nine banks, including Lloyds TSB, HSBC Royal Bank of Scotland Barclays and HBOS, are appealing and some are thought to be ready to go to the European Court of Justice.
Today Mr Justice Smith will begin another hearing to examine the possibility of challenging overdraft fees going as far back as six years.
One senior source at a top bank said: 'In many other countries, people have to pay for their current accounts. We've polled customers and nobody wants to pay a monthly fee for their current account.
'We have costs maintaining the network and overdraft charges are charges for a service. Fees for that service help provide free banking. A spokesman for the British Bankers' Association said: 'Banks believe their fee structure is clear and obvious because they make it clear in their terms and conditions when they write to customers.'

[Amethyst]

Re: Banks rake in £2.5bn overdraft fees profit

One senior source at a top bank said: 'In many other countries, people have to pay for their current accounts. We've polled customers and nobody wants to pay a monthly fee for their current account.
'We have costs maintaining the network and overdraft charges are charges for a service. Fees for that service help provide free banking. A spokesman for the British Bankers' Association said: 'Banks believe their fee structure is clear and obvious because they make it clear in their terms and conditions when they write to customers.'

oh change the record....the courts agreed a lot isnt it PIL, the Judge doesn't understand the charging structures, and although they polled people they are still introducing monthly account fees !

[TANZARELLI]

Re: Banks rake in £2.5bn overdraft fees profit

And would probably have done anyway as well as keeping the charges if it had not been chalenged by consumers.

[argentarius]

Re: Banks rake in £2.5bn overdraft fees profit

The £2.5bn isn't profit, it's the total amount charged.

It's like saying Tesco makes 15p profit on a 15p tin of beans.

Against this, the banks have the entire cost of running their current account operations.

Have a go at the level of bank charges, by all means, but don't call turnover "profit". (And that comment's addressed at the journalist, not anyone on here).

Re TANZ's comment, whilst many banks have introduced fee-charging accounts, none of the mainstream banks does not operate a fee-free account. Having an account with fees is an additional choice at present, not an obligation.

[ed.]

Re: Banks rake in £2.5bn overdraft fees profit

It's from Ellithorn's submission to Smith.

Daily overdrawn balance of £0.6 billion - £2.5/6 billion back.

[Amethyst]

Re: Banks rake in £2.5bn overdraft fees profit

The trading watchdog is preparing to release figures that will show for the first time how much banks make from charges on unauthorised overdrafts. The statistics will make up just one part of the OFT's review of the banking industry in a damning report.
An OFT spokesman confirmed the regulator is due to publish its findings later this month.

bout ruddy time too

[Guest]

Re: Banks rake in £2.5bn overdraft fees profit

Given that their cost of sales is all but zero, the turnover and profit figures are practically identical.

The Tesco comparison is meaningless. Tesco have a cost of sales, they need to buy the beans, they need to deliver them from a central warehouse to the store, they need to provide shelf space, heat and light and staff to take the payment. What does a bank do for its £38 charge when a DD is returned?

The banks do not fund their entire current account operation from these fees Current accounts are profitable for them already. These penalty fees are the jam on top.

For example, during 2007 RBS posted total retail income of £8.79 Billion with costs of £2.44 Billion. Clearly they make a profit without the penalty fees.

They just like to make more.

[argentarius]

Re: Banks rake in £2.5bn overdraft fees profit

The Tesco comparison is not meaningless. Your expansion illustrates why not, precisely.

In the same way that Tesco have to provide shelf space, heat and light and staff to take the payment, banks have to provide a banking infrastructure in order that customers can make payments (or attempt to make payments when they don't have the money).

I don't accept, at all, that the banks make money on current accounts if you exclude the income from overdraft-related charges.

Your RBS retail banking figures include profits from savings, credit cards and personal loans as well as personal current accounts.

The costs you have chosen to include completely ignore manufacturing costs (the cost of providing the banking infrastructure) of £1.7bn and impairment losses of £1.2bn.

Perhaps if you had quoted retail banking profit, excluding fee income, which is a loss of £1.1bn, you might reconsider your view that banks make lots of money without fee income.

[Guest]

Re: Banks rake in £2.5bn overdraft fees profit

You cannot compare grocery retail with banking retail, the two are like chalk and cheese, which was the point I made.

[argentarius]

Re: Banks rake in £2.5bn overdraft fees profit

Whilst there are differences, both types of organisation have both fixed and variable costs.

Your argument is based on the fact that the variable cost of overdrafts is next to nothing - and I agree. But so what? Businesses price their products to cover both fixed and variable costs - whether they are Tesco or RBS. The price of a tin of beans includes a contribution towards overheads as well as the cost of the beans.

Similarly, the price of an overdraft includes the marginal cost incurred - next to nothing - and a contribution towards overheads.

It is illogical to state that the cost of something is nothing simply because the marginal cost to the business is nothing, and hence to claim that turnover = profit. It's simply not true.

And there's no more reason that banks shouldn't make any money on overdraft fees than that Tesco shouldn't make money on selling tins of beans, given that the test case dismissed the penalty argument.

[Curlyben]

Re: Banks rake in £2.5bn overdraft fees profit

And there's no more reason that banks shouldn't make any money on overdraft fees than that Tesco shouldn't make money on selling tins of beans, given that the test case dismissed the penalty argument. - Actually that is STILL under discussion

There is no real argument there.
The issue is the level of profit that the banks see fit to gain from "breaches" of overdraft and returned payments.

At the end of the day the consumer feels they are being ripped off and taken for a ride. What we are really asking for is a more reasonable charging structure, asking for no charges at all is really preposterous.

I incurred exceeded OD charges from LTSB 10 years ago.
Now the WHOLE charge for the month was £6, I'm sure others will agree that this is a more reasonable amount.

The same scenario now garners a charge of £100+, where's the fairness in that ?!
Strikes me as blatant profiteering

[argentarius]

Re: Banks rake in £2.5bn overdraft fees profit

The penalty argument is not still under discussion, for current Ts & Cs. It is still under discussion (and the banks are very likely to lose IMHO) for historic and basic account Ts & Cs.

I'm not arguing (as I've already said) about the level of charges. But I'm quibbling the use of the word profit to describe charges. The two are different things and it was sloppy journalism. That's honestly all I wanted to say.

Banks went from a situation of paying no interest, in a world where interest rates were high (i.e. their interest margin was large and positive) to one where they pay some interest (in some cases) and interest rates are low (i.e. their interest margins are between slightly negative and slightly positive). Their income from standing balances has fallen very significantly. That's why fees have increased, not because banks are profiteering.

In the old days, customers paid for banking through a hidden but relatively large charge, in the form of lost interest on their account balance. Now they pay through explicit and relatively large charges, in the form of unauthorised overdraft fees.

You might think £6 is a reasonable charge for being in unauthorised overdraft for a month. I would suggest that it's a ridiculously low charge for running your current account for an entire month. And you wouldn't even expect to pay that in the months where you didn't go overdrawn! Such a charging structure is not viable or profitable for the banks in the slightest. I quite agree that "asking for no charges at all is preposterous", but the problem is that charging structures with "reasonable" overdraft fees will not, IMHO, give the banks the income they require and other forms of charges will end up being introduced.

[Curlyben]

Re: Banks rake in £2.5bn overdraft fees profit

I give up.
I don't know why I even bothered.
Unsubing.

[argentarius]

Re: Banks rake in £2.5bn overdraft fees profit

"Giving up" is a shame. If you have a point worth making, then it should be worth explaining.

I agree with much of what Curlyben says.

But the original article was poorly worded. Not every penny of what banks charge for current accounts is profit.

Whether charges are too high is a completely different matter.