Clare Francis: Research from moneysupermarket.com revealed that overdraft rates have risen by 9.9% over the past year and latest Bank of England figures customers show that customers who use their overdraft are being charged an average of 18.8% interest. So what’s going on? As well as overdraft rates going up, we’ve seen providers making other changes to terms and conditions. Kevin Mountford, head of banking at moneysupermarket.com, is here to explain what’s happening.
Q1: So Kevin, if we start with overdraft rates, why are overdraft rates rising at a time when the Bank of England’s slashed the base rate?
Kevin Mountford: Yes, I think we have calculated, on average, overdraft rates over the past 12 months have gone up nearly 10% and think there is a couple of main factors. The first one is all about risk-related, so in a market where we are seeing increased unemployment and ability of people to repay overdraft charges means it’s more challenging and the banks will reflect it in the price. The other thing is that banks are having to recover profit wherever they can and they will feel that they are getting squeezed on several fronts, and current account overdrafts is one opportunity to recover that.
Q2: Could it also be something to do with the ongoing court case obviously between the Office of Fair Trading (OFT) and the banks about the penalty charges, and in some ways if the banks can charge you more for being overdrawn in the first place it can offset some of the costs or lost revenue if they are forced to reduce these fees?
KM: Yes, I guess overdraft rates, which will be based on a certain metric, will effectively allow you to benchmark how much you are being charged by one bank against the other - but the problem is there is lots and lots of fees outside of that and that’s the issue of the OFT (Office of Fair Trading).
I think this is another example of where regulators squeeze the banks and say ‘you capping these fees, and so on and so forth’ and the banks are quite resourceful. They’ll look at other ways and maybe just by the interest element that is one opportunity to recover some.
Q3: Because we’ve already seen a couple of providers actually make quite radical overhauls to the way that they’ve structured their overdrafts - Alliance & Leicester and Halifax – in that rather than charging an annual interest rate they charge a daily fee for going overdrawn. Do you think we’re going to see more of that sort of thing and looking at different ways of charging completely?
KM: Yes, I guess that the rationale from the banks that have done that is to try and clarify what is a quite confused area for most consumers. I’m not sure they have actually achieved that because there are so many different variations. But as you mentioned with the Halifax product, they don’t even pay you any interest for being in credit - they just pay you a monthly amount.
But again often the devil is in the detail, and some of these things seem fine on the surface, but you have really got to understand your own utilisation of current accounts and how you behave as a customer to determine whether these work for you.
CF: And which one is best value?
KM: Yes, quite but as I say, I don’t think they have necessarily achieved what they set out to achieve, unless its just another opportunity of getting margin in by a different means.
Q4: And it’s becoming, because banks are using different methods, it’s actually becoming harder to compare isn’t it?
KM: It is - it’s even a challenge for the likes of ourselves because you have got different parameters which you need to assess products, whether they are good, bad or indifferent.
Q5: What about free banking, and the future of it? Because there’s been, in relation to the OFT court case with the banks, that if the banks lose and they’re forced to reduce the amount they charge people for exceeding overdraft limits and that sort of stuff, that the days of free banking are numbered? Do you agree with that?
KM: Yes, I think in a restricted sense, I don’t think we had free banking anyway. We have just been talking about all the fees and charges etc. What you have to realise that in the modern world as such, most banks do charge you a fee based on your level of utilisation.
I guess in this country with business banking you are typically given an account that allows you to run so many cheques or transactions, anything over and above that that you are charged. So I think a combination of factors again, not just the OFT, but the current economic pressures that is putting on banks profit which means they are going to have to look at alternatives and some sort of fee based mechanism on current accounts I think its more likely now then ever.
Q6: I think the common perception amongst a lot of consumers is that there’s no difference between current accounts - so it doesn’t really matter who you bank with - but there are differences aren’t there, and one account may be better if you’re regularly overdrawn, another may be better if you’re in credit, or using added benefits it might be worth paying a monthly fee. So would you say that people shouldn’t use this as an excuse to become even more apathetic and lazy and that actually –now more than ever – its well worth looking to see if you can get a better deal?
KM: Yes, I think with current accounts there’s three key propositions that the banks play. One is all about service, and lets face it if you have got a good current account that allows you to manage your money on a daily basis with no fuss, then that might be important to you. Also you can look at the rates, whether it be overdraft or whether it’s in credit because you can still earn 5% up to £2500.
The other one is where they use tactical incentives, so at the moment up limited until the first week in April, Alliance and Leicester will pay you £100 for switching. So it depends on what works for you, but as you rightly say don’t get lured into it purely by the headline proposition - make sure that the mechanics of the account actually work for you.
Q7: But equally don’t be put off because you think it’s too much hassle and there’s no point in switching?
KM: Yes, I think the perceptions of just switching current accounts is hard work anyway, out of all the retail bank products it maybe has the least amount of switching percentage-wise of the UK population then anything else, and this may be an historic situation whereby it caused problems. The banks have moved on in leaps and bounds so by and large you should be fine and as you rightly say don’t put you off switching.
CF: Okay, thanks Kevin.
KM: Thank you.