Daylight robbery?

Many say these charges are too high, but often the charges are incurred through carelessness in managing one’s personal finances. When this is the case, can the banks really be held responsible?

In recent times, there has been much debate about the high fees some banks charge their customers if, God forbid, they exceed their overdraft limits. The problem is particularly severe in the UK, where customers lose an estimated UK£1.6 billion through charges each year. The sting has been too much for many, who have found themselves facing excessive fees for crossing their overdraft limits by just a few pence. There have been cases were customers have been charged up to UK£39.

While in the past consumers have been reluctant to take on the might of the banks, the success of many in the small claims court have proven that they it can be done. Even government ministers have backed the cause to drive penalties down. One of these, Andrew George, Liberal Democrat MP for St Ives in Cornwall, UK, fiercely condemns some of the charging practices employed by UK banks. Following the success of one of his constituents in a court case against Yorkshire Bank plc, in which she was fined UK£922 during 2004, he has called for tougher action against banks and credit card companies.

“The case of Laura Saunders is typical of many constituents who have contacted me complaining about the penalties they face, often with little prior notification of the change in the rules by which their account will be managed,” he said. “Quite frankly, I believe that many lending institutions get away with blue murder in their treatment of low-income account holders. I hope that this case will be a salutary lesson to them all. I also hope that the government will sit up and take notice. Laura took on Goliath and won,” said Mr George.

In fact, it is actually illegal, according to the Office of Fair Trading, for banks to charge UK£25 when their customers become overdrawn. “When it comes to charging customers for exceeding the limit (for unauthorised overdrafts or not paying credit card bills or going over the limit) – the charge levies must do no more than recoup the cost incurred for returning the account to its normal stats and, therefore, incurring the charge in the first place,” identifies Sandra Quinn at APACS, the UK payments association. “Therefore, there is always likely to be some admin cost for putting the account back in order.”

Despite an investigation in 2000 by the UK government and the OFT into the high fees that banks charge, little progress has been made until now, when the authority has vowed to challenge excessive charges.

In fairness, when customers go beyond their overdrafts, they are dipping into money that does not belong to them and which they have had no authority to borrow. “The customer has not had the loan agreed,” says Joanna Elson, Executive Director of the British Bankers' Association (BBA). “It is not that difficult to arrange an overdraft.”

The Office of Fair Trading has also deemed the fees charged for late payments of credit card bills or for exceeding a limit too high. As a result, they have recommended that the fees be brought down to UK£12. This will bring far more clarity and transparency to the industry.

Defending the charges, the banking community is keen to stress that UK customers have a far easier deal than their European counterparts. For one thing, banking in the UK is free, whereas in many parts of Europe, customers have to pay an annual fee to have a current account, often as much as €50 a year.

“Around Europe, things vary, but it is common to pay an annual fee,” explains Quinn. “After you have paid this fee you may get a set number of cash-machine transactions including unlimited use of your own banks’ cash machines, and then a few transactions a month from other banks’ cash machines. If you go over those limits then you will be charged.”

Paying the price

At one time or another, most of us will have been charged, possibly, unwittingly for using an ATM. In the UK, following much publicity, all bank-owned ATMs became free to use in 2000, as did double charging. This is when customers could essentially be charged twice – once from his/her bank and secondly from the operator at the other end.

There are, however, still around 20,000 independently owned cash machines that do charge a fee, usually around UK£1.50, to withdraw money. These independently owned machines are usually situated in shops, bars and nightclubs. Although they are convenient, some people are reluctant to pay for their service, preferring to walk to the nearest free machine instead. “When confronted by a fee most people vote with their feet,” says Quinn. “The machines that charge are used a lot less than those that are free – 18 withdrawals per day as opposed to 213 transactions at a bank or building society-owned machine.”

Cash machines that charge usually do so because they do not generate much traffic and therefore need to charge in order to justify their existence. “In some locations, an ATM might not have enough traffic to justify a free machine,” identifies Graham Mott, Head of Planning and Development at LINK. “If a machine is really quiet, it will mean the costs will not be covered by the income. Obviously, below a certain level of traffic it will not be worth installing a machine. It is here that surcharges come in. The operators make the charge directly to the customer rather than the issuing bank. These charges are around UK£1.56 with the interchange about UK30p. A surcharge machine can be profitable with around 300 transactions a month whereas free machines are only profitable after 3000-4000 transactions a month.”

Despite efforts to warn people, there is still much confusion over which machines charge the user. People, often those in a hurry, may also ignore or miss the warnings. LINK, the network that oversees the operators of Britain's 55,234 cash machines has introduced new rules on charging following a critical report from the Treasury Select Committee last March, which recommended that ATM operators should make it clearer whether or not they charge users. “ATMs require levels of signage,” says Mott. “There should be a warning on the casing of the machine, a warning on the screen, and then as users proceed with the transaction they will have to accept it. Therefore, in theory, no customer should use a machine without being aware they are being charged.”

In many countries throughout Europe, no surcharge machines exist, rather users will be charged for using a machine that does not belong to their bank. The northern European countries such as Germany, Holland and Belgium tend to follow a similar pattern to the UK, offering independently operated machines, which surcharge.

Currency conversion fees

Using a cash machine when traveling abroad around Europe might also incur an unexpected charge. Some banks have currency conversion fees. This hidden surcharge is on top of the flat transaction fees that banks often charge for ATM withdrawals when customers are abroad. Cardholders will be charged around 1.5 percent plus a 2.75 conversion. These kinds of fees have been introduced to combat the loss of income due to a decline in the use of travelers cheques. A little research into the best deals before going away might find you the cheapest deal and ensure you save a few pennies.

Card companies may also charge a fee to make a purchase abroad using a card. These fees are know in the UK as ‘exchange rate administration fees’ and can be 2.75 percent of the transaction.

Seeing clearly

Steps have been taken in the UK to ensure transparency when considering a credit card. All marketing material from credit card operators have a summary box which contains upfront details about any charges that might be incurred when you use the card. From this information a best option can be decided upon.

Bank fees may be an inconvenience, but with diligence from customers many are avoidable. Ensuring credit card payments are paid on time, keeping within overdraft limits and researching how to avoid, or at least limit, ATM fees and other card charges abroad could well pay off.