High street banks: the worm has turned

You will have trouble believing this, but I'm beginning to feel a tiny bit sorry for the high-street banks. The last few years have been bonanza years for them. They've lent us insane amounts of money, often at interest rates that bear little relationship to the Bank of England's base; they've charged us outrageously overpriced Payment Protection Insurance on our personal loans (which few people need and practically no one can claim on); they've ripped us off with credit card cheques that trigger hordes of unexpected charges; they've sold us endless rubbish products' that we just don't need; and they've resolutely refused to pay us interest on our current accounts. And they've got away with it! Every year they've announced bigger and bigger profits from all of these faintly dodgy dealings, but had to put up with nothing more than a few minor and short-term grumblings from the public as a result. It must have all been very satisfactory.

So why do I feel for them? Because it's over. Barclays (click here to order this company's annual report for free) has just announced that it expects its Barclaycard customers to default on a massive £1.5bn of debt this year £140 for every cardholder in the UK. That's going to make quite a dent in the group's profits. At the same time, the PPI business worth anything from £1bn to £3bn a year, says The Times is about to go down the tubes. The Office of Fair Trading has noticed that for every pound in premiums taken, only 15p-20p ends up being paid back to claimants (ie, the banks are making gross margins of 80% plus on the business) and has said it is minded to refer the banks to the Competition Commission. That'll cost the big four a few hundred million each, I imagine.

But worst of all for the banks is a consumer-led campaign against bank charges. Seven years ago, legislation was introduced that was supposed to prevent the banks charging "disproportionately" high fees for minor crimes such as slipping 10p over an overdraft limit or bouncing a cheque. The banks ignored it and kept on making their usual charges (anywhere up to £39) at every opportunity, on the basis, I assume, that they would as they seemed to with everything else get away with it. They haven't. A year or so ago, I started hearing of people who complained about being overcharged getting their money back.

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It seems that the banks, knowing they didn't have a legal leg to stand on, simply repaid persistent complainers to keep the issue out of court and as many of their customers in the dark as possible. Now the problem has snowballed: it isn't just a few angry cheque-bouncers, it's what the Evening Standard calls "an unprecedented revolt". Last week alone, 50,000 templates for a claim letter were downloaded from the internet: if the banks want to keep every case out of court, it's going to cost them millions. The stockmarket barely reacted when the news of the Barclaycard defaults came out. But given all the other little problems hitting the banks (and I haven't even mentioned the possibility of rising mortgage defaults this week), I wonder if it should be so complacent?

Recommended further reading:

For more on consumer credit, read John Stepek's recent MoneyMorning article on why Britain's bad debt boom is just beginning and or our cover story on how to survive Britain's debt crisis. And visit our personal finance section for articles on banking, mortgages, pensions and more.