Banking on record profits

The UK's big five banks are expected to unveil combined profits of at least £32bn - more than the gross domestic product of Luxembourg - during the current reporting season.

But despite consumers' complaints that charges are rising, most financial institutions are finding that profits are coming in from overseas as activity on the UK High Street slows.

In fact, as consumers tighten their belts in the face of rising bills, many banks are having to write off higher levels of bad debts. - Source: BBC


But what are their actual secret to the record profits?
Cliff D'Arcy regualry writes for Motley Fool and he has written an interesting article:

Seven Things Your Bank Keeps Quiet
February 10, 2005

In a recent article, I wrote about how British banks have changed from reliable, prudent institutions into reckless, profit-chasing engines.

In the old days, banks would steer you towards their best products and help you to hold on to as much of your money as possible. Nowadays, their primary goal is to make as much profit as possible. (Please note that I'm not having a pop at bank workers; the real baddies are the people at the top who create strategies that always put banks' and their shareholders' interests first, second and third!*)

Without a doubt, the old-fashioned, cautious banker is all but dead and gone. These days, bank managers are motivated by demanding sales targets, which often leads to blatant mis-selling. A quick check of any major bank's latest results will reveal hundreds of millions of pounds put aside to pay mis-selling compensation. However, these sums are just the tip of a far bigger iceberg.

Remember this financial health warning: "Banks Can Seriously Damage Your Wealth!" Here are seven reasons why you should maintain a healthy degree of cynicism when your bank calls you and when you pop into your local branch:

1. It wants you to overspend
Banks make vastly more money from borrowers than they do from savers. Which product would you put most effort into pushing: a savings account with a 2% profit margin or a credit card that makes a 15% return each year? Hence, banks make far bigger profits from over-spenders than from careful budgeters.

By carefully controlling your spending, you can switch from being a borrower to a saver, which means earning interest, not paying it. Your bank may be disappointed, but at least your future will be brighter!

2. "Annual reviews" are really sales pitches
Bank branches cost a fortune to run and maintain. Hence, each must flog hundreds – even thousands – of products every month to avoid the chop.

One way to boost this selling drive is to invite customers to attend an annual review, which often happens more frequently than once a year. In his book The Money Secret, author Rob Parsons relates the true story of a teenager who visits his bank to discuss his small overdraft. He leaves with an approved overdraft at a rate of 111% APR (that's not a misprint – it includes interest plus a monthly fee) and a VISA card.

So, if you dare to go along to one of these appointments, remember that your bank is a hungry spider and you are a feeble fly. Don't get tangled in its web!

3. It would prefer you not to have a better account
If your bank offers you a new "improved" bank account, take this offer with a huge pinch of salt. That's because what's on offer is most likely a "packaged" account, which charges monthly fees of up to £15 in return for additional benefits of limited value.

Many customers get suckered into moving to one of these accounts, yet few make full use of their extra facilities. Meanwhile, their banks sit back and watch a reliable monthly income come flooding in.

On another occasion, you may notice that your bank has launched a brand-new account that has more attractive interest rates and lower charges than those you currently enjoy. Sadly, these products are used to attract new customers, so existing customers are prevented from applying, or receive lower benefits.

The same usually applies to other headline products, including special-rate mortgage deals. (Then again, HSBC and Nationwide BS both have a good track record for treating their existing mortgage borrowers fairly, so they get the thumbs-up. Elsewhere, it's tough being an existing customer!)

If you feel that you're getting a raw deal from your bank, or that your loyalty isn't properly rewarded, try switching banks. Thanks to a tougher Banking Code, this is easier to do than it's ever been.

4. It would prefer to keep savings rate changes under wraps
One of the biggest banking scams involves "dormant" savings accounts. An exciting new savings account is opened in a blaze of publicity and, after attracting a wave of "hot" money, it is closed to new applicants. After a short interval, the bank then starts to cut its interest rates on the sly.

In banking, this is called "bait and switch". The Banking Code has rules governing this behaviour, but they are delightfully vague and leave plenty of room for foul play:
"...at least once a year, we will send you a summary of... current interest rates"
"...if the interest rate has fallen significantly compared to the Bank of England base rate, we will contact you within a reasonable period of time..."

So, don't trust your bank to look after your savings - read these tips instead!

5. It wants to you to have high-priced debts
At some point in life, almost everyone borrows money. Indeed, at the end of 2004, we owed £875 billion to mortgage lenders and a further £184 billion to providers of personal loans, overdrafts, credit and store cards and so on. Banks have fed our addiction to debt for years, helping us to borrow as much as we can, but not enough so as to bankrupt us, because that's not in the banks' interest.

Unfortunately, eight or nine out of ten borrowers have chosen the wrong lender – one which charges far more interest than they would pay elsewhere. Big banks make tens of billions a year from charging borrowers the highest rates that they believe we'd pay. How do you fancy paying 6.75% a year for your mortgage, instead of 4.75%? Or being charged £1,150 interest on a £5,000 loan over three years, instead of £450? Or forking out £400 a year on a credit-card balance of £2,000, instead of paying nothing with an introductory 0% offer?

If we all switched to better borrowing products, we'd save at least £27 billion a year between us. That would pay for a lot of life's little luxuries!

6. It doesn't care about your future
If banks really cared about our future financial fitness, they'd sell us attractive and rewarding investments, wouldn't they? Sadly, in the real world, the investment products sold by banks are mostly pants. One problem is that most banks don't offer independent, unbiased advice across the whole range of investment products. Instead, they sell their own products through "tied" sales forces, which have a long history of chasing juicy commissions by flogging inappropriate products.

For example, banks sell hardly any cheap, simple, flexible index trackers, which passively track the stock market up and down, and are ideal for both beginners and experienced investors. Banks prefer to sell expensive managed funds, which are run by highly paid - and high-charging - City experts. The bad news is that around eight out of ten of these managed funds fail to beat their target index over the long term. So, the majority of investors pay over the odds for second-rate returns. Oops!

7. It loves to sell you over-priced insurance
After borrowing products, insurance policies are probably the banks' second-biggest money-spinner. Because banks have lots of contact with their customers, they have plenty of opportunities to sell insurance on the back of other products. For example, watch out for these "cross-selling" opportunities:

* Home (building and contents), life, health (income protection and critical illness cover) and mortgage payment protection insurance sold to mortgage borrowers.

* Motor and breakdown (roadside assistance) insurance sold alongside car loans.

* Travel insurance sold to borrowers arranging a loan for a holiday.

* Rip-off payment protection insurance sold alongside loans and credit cards, where commissions usually gobble up four-fifths (80%) of your premiums. Yikes!

The problem is that buying protection products from banks puts you at the mercy of my Rule of Three. This states that insurance policies sold by high-street banks and the like have premiums that are three times as much as those charged by Best Buy policies. So, if you don't shop around for every insurance policy that you buy, expect to pay what your bank thinks it's humanly possible to charge!