UK Banks are not as evil as you might think

When you work in an industry as highly regulated as financial services (and I have worked there both directly, and indirectly) you come to expect the odd scandal.  Pensions mis-selling, current account charges, ATM usage fees are just a handful of the recent uproars from financial services customers in the UK.

The latest decent sized revolt has been over “unfair” bank charges imposed on customers whose accounts have gone beyond their borrowing limits.

There is a danger of victimless crime syndrome here.  People who say “the Government should pay for our rubbish to be recycled” conveniently ignoring the fact that the Government is funded by us, the taxpayers.  People who make bogus insurance claims believing that “the insurance company has loads of cash and can afford it”, conveniently ignoring the fact that if everyone took that view, then the insurance industry would implode, meanwhile the do-gooders suffer ever increasing premiums.

Most people look after their bank accounts and service their borrowing requirements by agreement with their bank.  When a customer breaks that agreement, then it is fair for the bank to apply some (pre-agreed) penalties.  This represents a contribution to the cost of servicing a delinquent account and collecting/recovering the amounts owed.  If these fees are not charged, then the bank has to cover those costs somewhere.  I’ve seen estimates that the processing cost is as low as £2.50.  Don’t make me laugh!  When I worked at Bradford & Bingley in the 1980’s the cost of sending a single letter to a customer was measured at £15 and this is just one part of the process.  The £2.50 estimate conveniently forgets the costs of staff, premises, technology, insurance, heat, light (I could go on).  Even if technology has brought down costs (and I am not 100% convinced), the £2.50 is a mile away from realism.

Perhaps everyone would be happy if we went back to fee based banking (remember when you had bank charges for every debit and credit item on your statement)?

By the way, before anyone writes in and points out how unfairly they have been treated, I am aware that there are cases where the bank has not kept to its side of the bargain and charged fees that were not pre-agreed, or has made charges in error.  In these cases, the bank should (and will) pay up.  However, the general principle I am arguing for is that good customers should get a better deal than bad customers.  This seems to work quite satisfactorily in other industries (retail, general insurance, telecoms etc), why not banking?

(Retail) Banking is a highly competitive industry and is working on thinner and thinner margins, in the UK at least.  The largest part of most banks’ profits are coming from investment banking, where times are currently very good but will not always be on the top of the cycle.  So if retail banks are not allowed to collect fees from “bad” customers, then they will have to collect them from “good” customers.  Or do they?

Maybe we are missing a trick here.  Whilst it is true that retail banking margins are getting tighter, it is more true that banks are horribly inefficient.  You wouldn’t believe some of the business processes I’ve seen on my travels.  They provide neither good, timely service to the customer, nor low enough processing costs to make some products profitable for the banks.

The smart banks are addressing this issue of processing costs with technology (not offshoring) and using this as a lever to increase margins.  In an environment with ever more revolting consumers, this may be the sweet spot leading to the nirvana of profitable banking and happy customers.

One Response to “UK Banks are not as evil as you might think”

  1. Jonathan Says:

    It’s good to see your article. In fact, the majority of people agree with us, it’s just that the minority who pay lots of charges have been quite vocal on this, and the media have jumped on the bandwagon. See http://jonathan.rawle.org/2007/08/09/most-people-agree-on-bank-charges/

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