4.112 A significant proportion of consumers who, in the previous 12 months, had been charged for attempting to make a payment with insufficient funds (30 per cent of low income
respondents) did not know that such charges existed before they incurred them. Further, according to our survey 44 per cent of basic bank account holders were given no warning that these charges would be taken from their account.167
4.113 For those financially constrained and already facing a tight budget, being unaware of the likely level of charges or when, or indeed if, further charges will be applied seriously jeopardises a customer’s ability to manage his or her current account effectively.
4.114 The following example shows the disproportionate effect that charges can have on low income consumers:
‘A £38 charge for the typical housing association tenant whose weekly income is £216 gross represents 17.5 per cent of their weekly income. For comparison purposes it equates – in terms of impact – to a typical owner occupier’s weekly wage of £592 being charged £103.60 for an unpaid direct debit.’168
4.115 Evidence from Citizens Advice includes cases where banks, or other lenders, apply charges that have a disproportionate effect and push consumers into debt. Common themes include:
• entering unarranged overdraft by only a small amount (in some instances £1) but incurring insufficient funds charges that snowball to many hundreds of pounds
• multiple charges, for example a charge of £30 for going £15 overdrawn followed by a further £30 for the increase in the overdraft
• charges applied at unpredictable times which then trigger further charges – for example between benefit payment dates when there is no money in the account
165 Other reasons included the failure to receive expected payments, direct debits being paid at the wrong time, forgetting that payments were due and needing to make an unexpected payment.
166 According to the main banks 23 per cent of PCAs (inclusive of basic bank account holders) incurred at least one charge, including unpaid items, in 2006.
167 All of the main banks told us that, once a charge has been incurred, even though the Banking Code does not specify it, they inform consumers with at least a letter, or some make a telephone call, in order to warn of the impending debit.
168 Credit where Credit’s Due, report for National Housing Federation (2007), Niall Alexander.
• incidents of interest charged on arranged overdrafts pushing consumers into unarranged overdraft, resulting in charges
• banks concentrating on recouping their own monies – charges are taken without warning and without permission, to the detriment of other (priority) payments, such as rent, and
• attempts to clear debt hampered by level of charges. For example paying £30 each month to clear unarranged overdraft but faced with maintenance charges of £25 each month.
4.116 Another key message from our discussions with consumer groups was the adverse effect that the fear of incurring charges can have on the vulnerable. This is confirmed in a report by Bacs169which refers to customers’ perceived fear of:
• losing control of their bank account or balance
• companies being able to remove money whenever they choose
• banks making mistakes, for example with direct debits, taking out too much money or taking money on the wrong date
• the impact that charges would have on their budget, and
• not trusting their ability to save enough money or have the required funds to make regular payments.
Conclusion
4.117 Many consumers hold significant positive balances in their current accounts even though the vast majority of current accounts offer very low interest rates. While this may be a deliberate decision by some, and there is no suggestion that banks make it difficult for consumers to do this, a significant number of consumers could gain substantially if they switched to a better value current account or made use of a savings account.
4.118 A significant minority of consumers (more than 12 million accountsB+in 2006) incur
insufficient funds charges, and when they do they are more likely to pay at least six charges than one. The average charge for the accounts that incurred a charge in 2006 was £205Band many pay more.
4.119 Few consumers know what the credit interest and insufficient funds charges are that apply to their current account and, in the case of charges, many did not know the level of charges even after they had incurred them.
4.120 It is complex for consumers to keep track of their balance and know with certainty whether certain transactions will cause them to exceed their limit. Even if they can work out that they will incur a charge, it is very difficult for them to anticipate how much they will be charged.
Information is rarely available and the information that is provided is often not all in one place.
169 Bacs ‘a financial inclusion update – 15 November 2007’. Bacs’ research did not reference ‘the vulnerable’ but explored issues faced by the ‘financially excluded’, which was the term used in the research to cover younger working people, older people (working and non-working), those on cash income and those on low income.
4.121 The complexity of application is made worse by the tendency of those that do incur a charge to incur several charges. This may be because charges have ‘snowballed’ or because they have tried to go into unarranged overdraft several times during the year. Some consumers seemed unaware of how charges can multiply from one transaction, or even of the level of the charges. There seems to be an element of naivety in some consumers when considering the likelihood of incurring insufficient funds charges.
4.122 When consumers cannot easily assess the likely cost of their current account the incentive to assess the benefits of switching current account or of making better use of savings accounts is reduced. This limits consumers’ ability to drive competition.
4.123 It is not feasible to calculate how much consumers might lose overall from the current system of charges and costs as reductions in one revenue stream for banks might lead to additional charges elsewhere. However, we found that some consumers could miss out on up to £700 interest over the average lifetime of an account by remaining with their existing bank. The consumers who are likely to achieve best value for money from current accounts are those who maintain relatively low credit and debit balances.
4.124 In general, vulnerable consumers face many of the same issues that affect other consumers in the current account market, such as poor understanding of current account features and charges. Problems faced by vulnerable consumers can, however, be more pronounced and in some instances unique to this category of consumer.
4.125 In summary, the OFT has found evidence to suggest that
• the price and cost to the consumer of current accounts lack transparency, and
• controlling cost can be complex for some consumers due, in part, to the lack of transparency.
4.126 Transparency – Many customers are not familiar with the key prices associated with their current account and are therefore poorly placed to assess whether they are getting value for money, the potential gains from switching account, or how to manage their money better.
Even if consumers know key prices, such as credit interest rate, most do not have the information necessary to calculate total cost easily. Many consumers could switch to
apparently significantly better value current accounts, or make more use of savings accounts, but may be unaware of this because of the lack of transparency.
4.127 Control of cost – We found that it is complex for consumers to assess both the likelihood of entering an unarranged overdraft and the charges for doing so. Consumers are faced with multiple transactions, direct debits of varying amounts and timing, and insufficient
information to calculate possible charges. There is significant potential for slight errors in financial management to result in hundreds of pounds worth of charges. Despite this, consumers are not able to opt out of unarranged overdrafts should they prefer not to use them and some consumers may significantly underestimate the likelihood of incurring these charges. The size of the revenues banks derive from insufficient funds charges could reduce the financial incentive for banks to help consumers avoid charges.
4.128 As a result of these problems, we find that
• the incentive and ability to compare current accounts and drive competition for most consumers is inhibited, and
• many consumers may be less able to use their current account as effectively as they might, which in turn affects the value for money some consumers receive.
4.129 Despite these issues, consumers seem to be generally content with the levels of service that they receive through their current account, although satisfaction is lower for those who have incurred insufficient funds charges. While customer satisfaction is clearly an important outcome, for some consumers, at least, it may result from a lack of clarity about the implicit and explicit costs they are incurring.
Introduction
5.1 The previous chapter showed that many customers are not familiar with the key prices associated with their current account. This calls into question whether consumers will be able to make well informed decisions regarding their current account’s relative
competitiveness. This is key to a well functioning market as consumers who proactively seek better deals, on either price or quality, are the drivers of competition. Without proactive consumers, willing to switch between competitors, banks have little incentive to provide better offers. This chapter examines these decisions in more detail, looking at how consumers monitor the market, the factors that prompt them to start looking for a new current account and their perceptions and experiences of the switching process. The key findings of this chapter are as follows:
• first, there appear to be relatively few consumers who actively monitor the relative competitiveness of their current accounts. Indeed consumer switching appears to be driven more by bad experiences than proactive consumers seeking better offers. This absence of active engagement is at least in part due to a lack of transparency, resulting in the visible switching benefits for most consumers being relatively small, even though for some consumers the actual benefits can be substantial
• secondly, consumers have some valid concerns about the switching process going wrong. Over a quarter of switchers reported some problem with the process, resulting in poor consumer perception of the ease of the process. The fact that switching
consumers have little control over the process, but face a significant proportion of the consequences if the process goes wrong suggests an unequal allocation of the risks from switching, and
• thirdly, these concerns with the switching process and an unequal allocation of the risk are reflected in the finding that just six per cent switched in the last 12 months – one of the lowest rates in Europe.
5.2 In summary banks may find it hard to reach consumers effectively if they are unengaged or uninformed about the possible benefits from switching. This raises the possibility that the personal account market is stuck in an undesirable equilibrium. Without consumers willing to switch, banks have little incentive to provide better offers on charges or interest rates. But without better offers from banks, consumers have little incentive to switch. Breaking this circle by reducing the barriers on consumers switching would provide the banks with the incentive to provide new offers and increase productivity.