UK Bank Profits Surge On The Back Of Overdraft And Credit Card Fees
Despite the intervention by the Office of Fair Trading (OFT) to limit the maximum amount that UK credit card providers could charge their customers for credit card defaults to £12 without being considered an “unfair” charge, recent reports evidence that UK banks and credit card providers are still raking in millions of pounds in the fees and charges they apply.
A report issued by the price comparison website uSwitch.com states that UK banks and credit card providers earned more than £600 million from their customers by increasing their overdraft and credit card interest rates.
Typically, according to uSwitch’s research, the average authorized overdraft rate charged by UK banks increased by 1.3%, from 13.8% to 15.1%. At the same time, UK credit card rates rose by 1.2% from 14.8% to 16%, easily recouping the estimated £300 million that UK credit card providers are estimated to have lost by having to reduce their default charges from typical rates of £25 to the recommended OFT rate of £12.
According to the financial services comparison website Money Expert, this is only the tip of the iceberg. UK bank customers who unexpectedly go overdrawn on their current account without the permission of their bank could be faced with unauthorized overdraft fees which are as high as 33%. Even here, the mean interest rate typically charged by UK banks on unauthorized overdrafts are as high as 2.4% - more than 10% higher than the rate being charged on authorized overdrafts!
Commenting on the situation, Sean Garden, chief executive of Money Expert said, “Unauthorized overdraft rates are punitive at an average 25.4%, although banks and building societies will justifiably argue that if you have broken your agreement with them you should be charged a penalty price.”
Nonetheless, Liberal Democrat MP Matthew Taylor sees the fees and charges being charged by high street banks as nothing short of “ripping off” their customers. In the meantime, continued press coverage of this issue has now prompted the OFT to examine the fees and charges that banks are charging on both authorized and unauthorized overdrafts to determine if these fees can in any way be classified as “fair”.
And, given that the BBC’s Money Programme estimated that the maximum cost to a bank in dealing with any unauthorized overdraft ran to £4.50, while the fee being passed on to the customer was typically in the amount of £30, justifying this fee may become increasingly difficult for UK bank’s and building societies to do.
However, it is likely that the act of raising the interest rates charged on unauthorized and authorized overdrafts by UK banks and building societies will fall outside of scope of the latest OFT investigation – thereby ensuring that they continue to rake in millions of pounds in profits for unwitting customers who can ill-afford to paying such high rates in the first place.
Alisdair Milton
15th January 2007
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