Bankers are laughing all the way to the bank
Going overdrawn can be an expensive business. In the UK, unauthorised overdrafts averaged £680m on any given day in 2006 – just over £10 per bank account. According to the Office of Fair Trading, the charges levied by banks on those overdrafts were £1.5bn, a tasty return of more than 220 per cent. Banks also make money by paying risible interest on positive balances – an incentive to keep your current account lean and, Doh!, to overdraw accidentally – and by other obscure charges. The Office of Fair Trading doesn’t like it and nor do many customers – although they rarely express their displeasure by switching bank accounts.
There are two common responses. People either grumble about money-grabbing banks or point out, smugly, that if only others would manage their affairs responsibly, they wouldn’t incur any of these charges.
There’s a certain amount of truth in both responses. Yes, banks are money-grabbing, but healthy competition would keep the greed in check. And, yes, careful customers are being subsidised, heavily, by careless ones. The trouble is that the whimsicality of the pricing makes it hard to find out which bank is offering a good deal. Most people realise that overdraft charges are steep, just as they realise that popcorn in cinemas is expensive and mobile-phone companies will all but pick your pocket if you make calls overseas. Knowing this doesn’t make it easy to find the best product, which means competition won’t work well. When competition works poorly, many customers lose out – even those who bring their own snacks to the cinema and use public phones on holiday.
So what’s the solution? One possibility is for regulators to step in and set price ceilings in such cases, or to ban more complex offerings. But once the tourism office starts fixing the price of a can of Heineken in your hotel fridge, that spells ossification and bad news for consumers in the long run.
Another possibility is better financial education – unobjectionable in itself, but an indirect attack on the problem of complex tariffs. The severity of that problem was clear when two economists, Chris Wilson and Catherine Waddams Price, tracked the attempts of customers to switch to cheaper electricity tariffs. Most picked up less than half of the available gains, and a quarter made themselves worse off.
I have heard one really good – and, I believe, genuinely new – solution, presented in the book Nudge, by Cass Sunstein, a law professor, and Richard Thaler, an economist with a particular focus on flaws in people’s decisions.
They advocate a system of mandatory electronic disclosure. Regulators would specify a standard electronic format in which banks would have to disclose all their fees and charges, and how they intersected with what the customer had actually done. (The idea could also work for credit cards, mobile phone services and others.) Each year, customers would receive an electronic file itemising exactly what they had done and exactly what it had cost them.
Thaler and Sunstein anticipate – correctly, I suspect – that if such electronic files existed in a standard format, other companies (Morningstar? Google? Microsoft? FT.com?) would quickly set up their own services. You would take your electronic bank account statement, upload it to Google Consumer, and be told in plain English how your bank had screwed you, and which bank would do a better job, given your particular banking habits. Even those who couldn’t or wouldn’t use such electronic advice would benefit from the sharpening of competition it would engender.
Implementing the idea may not be easy – but for those of us who think competition can occasionally be given a helping hand, it seems worth trying.
Also published at ft.com, subscription free.