Why we are becoming the first UK bank to show foregone interest on our statements
29 July 2015 By David Millington
The UK Competition and Markets Authority estimate that UK banks made an incredible £8.1 billion from current account customers during 2013. That’s more income than Facebook generated last year, or, put another way, is equivalent to the total annual salaries of around 305,000 people in the UK (that’s roughly the population of a city the size of Nottingham). Pretty good going considering current accounts are free, right?
Well, they say there is no such thing as a free lunch, and the reality is that for the vast majority of customers current accounts are not free. In fact, banks make an average of £125 from every customer, every year, and most of that income comes from two main sources: overdraft fees and foregone interest.
Overdraft fees account for just over £3.60 in every £10 banks make from customers. It’s sometimes assumed that this is generated from customers who spend beyond their agreed overdraft limits, but that’s not totally accurate. More and more banks are now charging their customers monthly or even daily fees for simply making use of an agreed overdraft facility. That means that many customers are now paying far more for agreed overdrafts than they were previously.
But the banks’ biggest source of current account income isn’t fees or charges. It‘s actually the money they generate by lending out the salaries and other income current account customers pay into their accounts. And because 80% of current accounts don’t pay any of that income back to their current account customers, the banks are able to generate a combined total of £3.2 billion pounds every year from this alone – nearly £50 per customer. That’s a lot of money that many customers don’t know their banks are making at their expense.
So is that fair?
Well, at Tesco Bank we don’t believe in charging expensive daily or monthly overdraft fees. Instead we charge a single interest rate so that customer’s only pay for what they use. We are also one of the only banks in the UK to pay interest to every current account customer who has a credit balance, regardless of whether they are a new or existing customer – paying 3% AER on balances of £3,000 or less*. This means that the majority of our customers do not miss out through foregone interest.
This week we will become the first UK bank to show foregone interest on our customers’ monthly statements. So if, for example, a customer has more than £3,000 in their account, they will have a clear picture of what they could have earned by transferring their remaining money into an instant access savings account with us.
Ultimately, it’s up to customers to judge whether they are being treated fairly. But if the banks don’t give customers a true picture of the costs, then it is a pretty hard judgement to make. Showing foregone interest in statements is a small but important step in helping customers understand that true picture. We hope other banks do the same.
* £5 monthly account fee which you don’t pay if you deposit £750 per month. The Tesco Bank Current Account is available to residents of England, Wales and Scotland aged 18 or over. Accounts are subject to status.3% AER/2.96% Gross variable credit interest on balances up to £3000. Interest paid monthly. Annual Equivalent Rate (AER) illustrates what the interest rate would be if paid and compounded each year. Gross is the interest rate paid before tax is deducted.