Let's break the bank cartel

The most popular blog post I've ever written on this website was about bonuses and the ongoing question of why bankers get paid so much. Bankers like to think it is because they are uniquely talented. But the reason is simply that the money is there: bankers get paid millions because banks make billions. So the real question is: how do banks make so much money so consistently?

The answer? Because they operate much like a cartel. They charge extraordinary rates for everything from investment banking to overdrafts. And they all do it in much the same way. Just look at the overdraft rates charged by the big-name banks: those who still charge via a traditional interest rate, rather than the new and rapacious set fee system, all charge 19%-20%. Remarkably similar. Then there is the Payment Protection Insurance business: in a competitive system one bank might have broken ranks, cutting prices or even telling customers their rivals weren't telling the whole truth about it. Instead, all the banks mis-sold it for years at vast profit. They've been caught out on that one: this week a High Court judgement suggested they will have to compensate millions of people. But I daresay that even as you read, they are thinking up a new wheeze to replace the lost profits.

So why don't banking clients do something about it? Why do CEOs looking for investment banking advice put up with overpricing? And why do consumers? The answer to the first is doubtless because CEOs are spending other people's money. But the answer to the second is about confusion. I've spoken to many people recently who have had their current accounts for 15 to 20 years. Most aren't happy, but they think that moving is too complicated. That simply isn't the case. Say you want to move your account to First Direct. You just need to fill in a relatively short form and give a transfer date. They'll then transfer your standing orders and direct debits over.

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The recent Independent Commission on Banking (ICB) report suggested it should be easier to switch accounts. But it's already easy. So instead of changing the system, the banks should surely just be made to advertise the fact they already have a perfectly good one. Changing from one high-street bank to another won't get you much of a better deal immediately (that's cartels for you), but shifting to some of the new competitors might. The banks watch their churn rates as much as any other business. If they see they are losing customers to the likes of Metro, Virgin and Tesco, they will soon begin to change their ways.

PS: Don't think we haven't noticed that gold which we first tipped at $260 has hit $1,500. And don't forget to make a note in your diary we're holding the first MoneyWeek conference on Friday 17 June, in London. More details to follow soon.