Consumers pay thousands for being with the wrong bank
New Which? research finds that consumers are potentially losing thousands of pounds a year in fees and charges by being with the wrong bank, yet can't easily compare accounts to switch.
We compared overdraft charges, interest forgone if you're in credit, and using your debit card overseas between 21 current account providers. In our worst case scenario, going overdrawn without permission and having payments rejected could cost an extra £183 in fees and charges a month with the Bank of Ireland Clear Account Level 1 – the most expensive – compared to the Halifax Reward Current Account – the least expensive. Over a year this could add up to a massive £2,197 if you do this every month.
Even if you only use an authorised overdraft – as our latest consumer insight shows that five million households do – for just a few days a month, you could be around £120 worse off a year if you bank using TSB's, Lloyds' or Bank of Scotland's Classic Account, rather than Clydesdale bank or Yorkshire bank's Current Account Direct.
Consumers could avoid these fees if they switched to an account that is better suited to their needs. For example, while Halifax's Reward Current Account is cheapest for using an unauthorised overdraft, it is one of the most expensive for authorised overdraft charges. But the information that banks make available to customers at present doesn't allow people to compare accounts based on their needs.
Separate Which? research finds that half (52%) of consumers who haven't switched banks say they'd be more likely to if it was easier to compare accounts, yet only a quarter (26%)* agree that this is easy to do at the moment. And previous Which? research found that current account charges are so complex that consumers cannot work out the cost of running an account.
With the cost of living top of the agenda, ahead of the Autumn Statement we are calling on the Chancellor to step in and use powers he already has to force banks to release data about how customers use their accounts. This can be used to develop comparison tools that allow consumers to rank providers by cost based on their needs.
Banks already have this data and are using it to design products and services but they don't all share it with their customers in the same way. Which? is calling for banks to make this information easily accessible and usable to consumers in a format consistent across all providers, so they can see which bank account is best for them and avoid hefty fees.
Which? executive director, Richard Lloyd, said:
“Our research lays bare the huge difference in fees and charges between current accounts. With many households relying on their overdrafts to cope with the rising cost of living, we're calling on the Chancellor to force banks to release information so consumers can make sense of the way they use their account and choose the one that is best for them.
“Unless banks make it simple for people to compare the cost of running a current account, the new switching guarantee alone will fail to transform switching rates or significantly increase competition in banking.”
Trust in banks is at rock bottom, but putting consumers back in control should help to restore this lost confidence and may help to increase competition in the current account market, forcing banks to compete on cost and quality of services.
Two-thirds (64%)* of those that have not switched bank account in the past 12 months think banks should be more transparent about the total cost of the charges that people incur, and a quarter of all people (23%) think there is a current account on the market that better suits their needs. This increases for those who use an authorised overdraft (24%) and an unauthorised overdraft (46%).
We've found overdraft charges can be more expensive than payday loans and yet these will not be included in the new credit rules that were announced by the Chancellor this week. It's time the Government stepped in to clean up the whole of the credit market, and help people avoid these massive fees.
Notes:
*Respondents with packaged bank accounts were excluded from this question as they will pay a regular monthly fee for the service that they receive.
1. Current account research: Which? surveyed 21 providers in November 2013 on the costs of their free-if-in-credit accounts based on five scenarios:
In-credit scenario: A consumer has an average balance of £1500, and takes one four day trip to Europe making two £100 cash withdrawals and two £50 debit card payments. The cost of in-credit banking is defined as the different between interest earned on an average balance of £1500 and what you would earn in a best rate instant access savings account.
Authorised overdraft scenario 1: Builds on the in-credit scenario but with an average balance of £1,000 and includes the annual cost of using an £200 overdraft for six days a month.
Authorised overdraft scenario 2: Builds on the in-credit scenario but with an average balance of £1,000 and includes the annual cost of using an £600 overdraft for 20 days a month.
Unauthorised overdraft scenario 1: Builds on the in-credit scenario but with an average balance of £1,000 and includes the cost of being overdrawn two days a month. On day one the credit balance is £114.13 and a £200 direct debit leaves you £85.87 overdrawn. On day two a further £60.52 direct debit leaves you overdrawn by £146.39. Provided in both a monthly and annual cost
Unauthorised overdraft scenario 2: Builds on the in-credit scenario but with an average balance of £1,000 and includes the cost of being overdraft for five days a month. On day one a payment of £50 takes you into an unarranged overdraft. Day two another payment of £50 is made taking you further into the unarranged overdraft. On day three two payments of £30 are rejected. On day four one further payment of £30 is rejected, and on day five one further payment of £30 is rejected. Both provided in a monthly and annual cost.
2. Survey on non-switchers: 1,055 members of the general public completed an online survey between 9thAugust and 18th November 2013. 1,001 had not switched current account in the past 12 months.
3. Which? consumer insight tracker: Around 5% of people use an unauthorised overdraft each month, and 19% use an authorised overdraft. [Populus, on behalf of Which?, interviewed a representative sample of 2126 UK adults online between 22nd and 24th November 2013. Data were weighted to be demographically representative of all UK adults. Populus is a member of the British Polling Council and abides by its rules.]
4. Cost of running current account: In November 2011, Which? gave a group of bank customers a mock statement to calculate the cost of using an unauthorised overdraft spanning 14 days and involving 10 transactions. Not a single person managed to get all the calculations rights – despite one volunteer studying for a PhD in maths.
5. The Government currently has Midata reserve powers under the Enterprise Act and Regulatory Reform Act 2013. Midata is a programme designed to give consumers access to their personal data in a portable and electronic format so consumers can these use this data to help them better understand their own consumption behaviours and patterns, as well as make more informed or appropriate purchasing or consumption decisions. Current accounts are one of two areas of financial services that are explicitly named in the legislation. This means that the Secretary of State can require personal current account providers to provide customer data to consumers and specify the form it should take. Which? wants this data to be downloadable and released in a consistent manner across the industry to ensure that customers have anonymised, clear, and comprehensive personal usage data. This data can then be used to develop comparison tools that allow consumers to rank providers by cost based on their own personal needs.
