Complexity for complexity’s sake
While other industries bend over backwards to accommodate their customers’ needs, financial institutions seem to expect their customers to adjust and become more finance-savvy and educated, lest they inadvertently lose money in the process, with no fault and full benefit towards the bank, of course.
Yes. You read that right. Banks rely on customer trust in more ways than one. Yes, they need you to trust them enough to keep your money with them, and yes they offer good deals left and right for you to “earn” while you keep your money with them. Have you ever given a thought about what’s in it for them? Unbeknownst to you, your bank is more likely making money off of your money, and will likely be charging you for it too all the while you thought you are saving money! Anthony Thompson, a career financial services marketer turned banker, and co-founder of three banks - Metro Bank UK, ATOM, and 86400 - all of which challenged the major players in the UK banking industry said:
“…customers should have a healthy level distrust of financial services in general and banks in particular…many banks have ripped customers off, and in some instances, left the taxpayer holding the bill”
As it happens, there is a lot of reason to distrust the banking industry. Year after year, multiple bank scandals litter the front page, so much so that scandals seem to have become the norm in finance. There was after all a string of scandals in 2014 has all but eroded trust in banks. Industry giant Standard Chartered has established a board-level compliance department in order to monitor fraud within its own systems to deal with such issues. Citigroup even has an allocation in its budget for future litigation costs amounting to $ 15 billion. It seems that Jason Karainan, a global finance and economics editor, was on-point in noting that “quarter after quarter, big banks seem to spend as much time discussing the details of litigation charges as they do on their core businesses.”
Time and again, these institutions have been subjected to multiple fines and penalties by government regulatory bodies. It appears however that lessons remain unlearned. Banks like Standard Chartered and Tokyo-Mitsubishi UFJ were both given another fine for covering up their failure to pay an initial fine for a similar violation - and these are cases in point. The rigging of interest and foreign exchange rates are also topics of investigations. Scandals are so ingrained that it is a viable strategy for a bank to confess its wrongdoing to authorities for a smaller fine as opposed to being reported by their competitors.
With that kind of reputation, a plausible corresponding, albeit misguided, attempt by the industry to clean up its image was undertaken. It was found that banks were backing biased studies to make it appear they were trustworthy. Naturally, some industry players were fined for doing so, in an attempt to discourage this kind of behavior. Like clockwork however, years after that scandal settled, it was found that these institutions were once again promoting distorted studies as if no fine had already been imposed before.
Aside from anecdotes from the news and a reputation for dishonesty, one study published by Nature, a scientific journal, found evidence that bankers bent the truth the most when asked to report the results of unobserved coin flips in exchange for money, when compared to people in other lines of business. This is even more so after asking about their profession (as bankers) is rendered salient. The authors state that their findings suggest that the prevailing business culture in the banking industry weakens and undermines the honesty norm.
If banks are not, or cannot even be honest with the government wherewithal the tax avoidance schemes, and bankers have a tendency towards dishonesty, what would incline the institution to be completely honest with its customers? Recall a bank's purpose is to profit for itself, not you. It's their job to put your money to work for themselves.
The devil is in the details
So, with those facts in one hand, and the aforementioned healthy distrust firmly in the other, here are some completely legal mechanisms by which banks are able to make the most out of you.
First and foremost, there is the rate difference. Many of you will have heard by now that leaving and saving money in the bank is akin to having “sleeping” or “idle” assets. Aptly named because the cash you keep in the bank is not earning. Alright, technically, money you leave in the bank can earn a very minuscule 0.5% interest per annum. As they say, “a penny saved is a penny saved”, or in this case, earned. Is it really, though? Your cash is working against the inflation rate - the amount at which goods and services become more expensive each year. This varies per area, however Statista noted the global inflation rate in 2019 was at 3.56%. Take this against the 0.5% your idle assets “earned” and you will find you actually “lost” 3.06%. You know who earned with your money though? The banks. They lend money at very high interest rates, with steep fees and penalties for defaulting. A situation that leaves more money for the bank, and less for its clients.
The devil is in the details with banks, as the fine print buried in their voluminous terms and conditions can cost you more than a pretty penny. They often aggressively and repeatedly up-sell products that are very complicated to understand, until such time you agree, only to hit you months later with fees that were, yes, written in the terms and conditions in their very fine print, one might add. On the other end of the spectrum, they can oversimplify products and offer the very attractive “0% interest”, but never even once mention that has retroactive interest -where you pay MORE interest should you fail to pay for your card on time during the period. Bonus savings rates offered to entice you to open an account are also usually temporary. DId you know that doing a balance transfer can sometimes terminate deferred payment promos? Again, they will not tell you that. These are all written in the jargon-ridden terms and conditions, which they expect you to read and understand before affixing your signature of agreement, so it is important to always look for hidden fees, and understand before signing. Ask questions, because the bigger fool is the one who had to pay because of not knowing.
Overdraft charges are another favorite loophole of banks, where they allow you to withdraw more than the value available in your account, and then charge you every time you do so. Should you make several withdrawals in a day, banks are capable of rearranging the transactions in order to ensure maximum fines. As an example, say you know you have 30 dollars in your account, and withdraw 10 dollars in the morning, 15 dollars at lunch and 20 dollars in the evening. You will have exceeded your account’s value on the third transaction only, thus incurring the penalty once. However, should the bank rearrange the transactions, putting in the 20 dollars first, 15 dollars second, and 10 dollars last, you would incur the penalty twice. Therefore it is important to monitor your transactions, or better yet, never overdraft as much as possible. Deposits need to be monitored as well, because banks can sit on a deposit to your account, giving you the impression that you are funded, when in fact, all withdrawals are counted as overdraft. You will have to fight tooth and nail to reverse those charges.
If a credit card is attached to the aforementioned savings account, the fees can compound to become even higher. On top of the incurred fee, the credit card can automatically grant a cash advance towards the account. In other words, the bank lent you money through the credit card with, yes, the high interest rates that are effective immediately. Best make sure that this option is not active, if that is a possibility, or at least revoke permission for a credit card to fund an account.
With quotas imposed on bankers, some have resorted to creating fake accounts without the client’s consent or knowledge. It is better to have your own record of your accounts and balances, apart from the statement given by the bank. Keep receipts as proof of transactions so that should a discrepancy arise, you will have facts to back your claim. Dispute any account you did not authorize.
Tricks of the trade
Now with their self interest in mind, an interesting chain of events is noted. First, banks would lend money to clients who clearly cannot afford to pay a loan amount. Multiply this and a large number of defaults would cause a crash - case in point, the 2008 Housing Crash. With the banks in crisis, the government steps in and bails out the banks. One would think this is a situation that would rather not be repeated, but lo and behold and they’re at it again - this time with car loans. Then when the system crashes, they rely on taxpayers’ money for a bailout. Again, your tax money was given to the banks.
With all that work you would think their employees would at least be compensated well. Those at the top, maybe. Executives at Barclays even gave themselves bonuses despite dwindling profits, while the rank and file employees regularly have their overtime pays withheld. More money for the bank once more.
The sad reality is banks are in bed with the government - as they have huge sway over policy makers by funding their political campaigns. Though it would “take a generation”, perhaps more, to clean up the moral situation of the banking and financial industry as a whole, given what we have at this point, the best we can do is stay sharp and on top of our own personal finances, while remaining vigilant of fees hidden in complex financial words designed to confuse the non-bankers through financial education.
The content in the blogs is solely for general information and to help potential clients get an idea of how we work. They are not recommendations that should lead to the purchase or sale of assets and are not investment advice. Marmot.Finance cannot judge whether and how the statements made fit your investment objectives and risk profile. If you make investment decisions based on this blog entry, you do so entirely at your own risk and responsibility. Marmot.Finance cannot be held responsible for any losses you may incur as a result of information contained in this blog entry.The products mentioned are not recommendations, but are intended to show how Marmot.Finance works and selects such products. Marmot.Finance is also completely independent and does not earn money in any form from product providers.