Judging the level of value you get from your bank is about more than getting free gifts and avoiding monthly fees. The banks have plenty of ways to recoup the cost of their freebies and make money from your deposits, some of which are more obvious than others...
Borrowing
Banks make money by investing a portion of your cash in various financial products, or using that money to secure the funds they need to invest. They could be buying shares, bonds or simply funding their loans, and the proceeds of this income are kept as a type of hidden fee for their services.
Since the banking crisis, there have been calls to separate 'retail' and 'investment' banking arms in order to ring-fence savers' cash. However, the centre-right Policy Exchange think tank has recently argued that such a move would put free banking at risk and lead to branch closures. For now, it seems as though this money-making tactic is here to stay.
Lending
Banks offering credit (loans, mortgages etc), take interest payments for this service. Usually, this is far in excess of inflation and costs, though how much so will depend on how big of a risk the bank considers you to be. This is a huge source of profit for the banks, while loans are often funded with deposits from other long-term savers.
Credit card fees
Credit cards don't just earn banks money through interest payments - they also apply a transaction fee to every single purchase. Retailers will usually foot the bill for this, but these costs are passed down in the form of higher prices for everyday items. Certain providers will share a portion of their transaction fees with you in the form of cashback deals, so be on the lookout for banks that offer this incentive.
Unplanned overdraft requests
When people think of hidden fees, this is usually the first thing on most people's minds. A big legal dispute between the banks, the Financial Services Authority and, subsequently, the Financial Ombudsmen Service played out in 2009, but it failed to resolve the issue, and banks are still able to charge customers fees for accidentally exceeding their overdraft limit.
The only caveat for banks is that they must 'deal positively and sympathetically with a consumer in financial hardship', although many now have a small buffer (normally £10) before charges are applied.
Processing cheques
Ever wondered why it takes so long for a cheque to clear in your account? There may be a significant amount of processing to be done, and a cheque may 'bounce' up to six days after it's been cashed, but some banks intentionally delay the process so they can accrue a small amount of interest on cheques before they are credited to your account. Most publish their clearing cycle online, though, so you can check for yourselves whether they needlessly delay the process. See the Co-operative Bank's policy, or that of RBS, for a good example.
Some banks publish a document explaining their charges, while others like to surprise you as time goes on. It's worth seeking out your bank's policies to make sure you are getting the most for your money. Once you know how it all works, try our free Money Dashboard budgeting software to help you keep track of all of your current account costs, earnings, bills and more.
Posted by Marc Murphy, Marketing Manager at Money Dashboard.
