Why is there a High Street Bank exodus?

Reports claim that customers are migrating away from the Big 5 in favour of smaller financial firms. The recent ‘overdraft scandal’ has done nothing to improve the big bank’s image as money-grabbing fraudsters.

Recently, hundreds of thousands of people downloaded letters from websites such as the BBC, and Which? , as they attempt to reclaim the excessive – and illegal - overdraft fees charged by banks.  The recent court decisions in the consumer’s favour are giving the banks migraines.  The bank Credit Suisse estimates that the UK’s high street banks collectively earn £1.2bn a year from penalty charges on unauthorized overdraws.

"We wouldn’t like to divulge those sorts of numbers," said a spokeswoman for Barclays, citing "commercial confidentiality".

"It is now considerably more at the banks," said a well-informed industry observer.  "It is also operationally a major headache," he added.
 
So far, £8.4m has been recovered by the Consumer Action Group (CAG).  Many bank customers are receiving hundreds, even thousands of pounds in refunds. 

The fees are misleading, and unfair.  A survey from MoneyExpert states that three-quarters of bank clients would rather pay monthly fee if penalty charges were discontinued and service improved.

Service is a major complaint, especially with saving accounts.

Consumer watchdog groups also claim that consumers are complaining about their savings accounts.  Low interest rates on savings accounts is the #1 complaint among bank clients, according to a survey from consumer group Which?.  Almost 50 per cent of Which? members said they are "annoyed" with their bank’s interest rate, some claiming that their accounts pay only 0.1% interest.

"Opposition to paid-for banking may not be so severe if banks can prove it’ll result in a fairer system," Sean Gardiner, chief executive of MoneyExpert.com, said.

"But banks have to be realistic. To extend that [fee-based banking] to everyone without bringing to the table extra services or better prices is not going to be a popular move," he added.

The third major complaint is the bank’s attitude toward bad debts. Many consumers believe the banks should shoulder some of the blame for the current debt problems.  A quick look at the forums reveals hundreds of gripes and complaints where banks handed out credit cards, with limits in the thousands, as wedding favours, and at campuses – without a credit check. 

Consumers feel the banks took advantage of their trust, and abused the system, by lending them more in loans than they could realistically repay.

This is most common among teenagers who, according to Credit Action, believed that the banks were giving away free money in a bid to win their loyalty.  A large number of teens are shocked to find that they must repay their credit card bills. 

A larger number of parents are shocked to find that a bank agent walked onto campus and gave a non-working, not old enough to vote or drive, kid a credit card without a background check or parent authorization.

If this isn’t underhanded, immoral, unethical, and just plain irresponsible, I don’t know what is?  Many people are suggesting that the banks, not the teens, or their parents, should be responsible for any debt accumulated by a minor.  Unfortunately, the banks will collect millions of sterling pounds from disgruntled parents before the Office of Fair Trading is even aware of the problem.

The question is, ‘where do you go?’ There are quite a few legitimate banking institutions that operate outside of the traditional banking umbrella.  As long as a firm is located in the UK, are a member of the governing association, and has an ‘all clear’ from Credit Action, or other debt management firm, then it should be a good bet.

What is not a good bet is the myriad of schemes that are starting up to ‘fill the void.’ One is the consumer co-op type of scheme.  You have money, so you lend it to someone who needs it.  You make more profit than a savings account.  I pay less interest than at the bank.

The risk is high.  The numbers of people who join these schemes for a few months and then jump the country with a sizable fortune are growing. The chances of collecting your money from a delinquent account – almost nil.

The cost of collecting a bad debt can be much higher than the loan amount. If the borrower decides that they want to petition for an IVA or bankruptcy, the chances of collecting the debt is zero.

We could be forced to endure the piracy practices of the high street banks for a few years until the financial industry cleans house and finds some new ways to help a new generation of financially savvy consumers manage their money and build wealth.

Until then, we can bite back when the bank’s try to charge illegal fees, we can invest in ‘non-financial products’ to build wealth, and wait for the day when the banks realize that they need us more than we need them.

Almost 80 per cent of the Bank’s customers are willing to leave because of stealth charges like the proposed fee for ‘not’ using a credit card. The next group is hunting for new savings and investment programs.

David Kuo, head of personal finance at Fool.co.uk, commented: "There is tremendous tension between banks and their customers.

"This has not been helped by the embarrassing exposure of punishing charges at a time when banks are also reporting huge annual profits," he added.