A new chapter for high-street banks in the PPI mis-selling saga

The PPI mis-selling scandal is nearly over for the banks. But a new nightmare may be just about to begin.

Woman paying for a coffee with her phone © Getty Images

Lloyds has just seen six years of profits wiped out at a single stroke. RBS has posted a huge quarterly loss. Barclays and Santander have taken big hits. The payment protection insurance (PPI) mis-selling scandal has turned into a neverending nightmare for the main banks. The policies came with so many conditions they were virtually worthless and almost all were mis-sold. Over the last few years the banks have paid out an estimated £44bn in compensation to millions of customers.

This was no accident

But hold on. In truth, it is not really over. PPI was no one-off accident. It is not as if a few over-enthusiastic branch managers went a little crazy and started over-selling a product they hadn't really understood. Nor was it caused by one or two banks going rogue. PPI was systemic. For years it was virtually impossible to buy any financial product without coming under pressure to take out PPI. Why would supposedly well-managed companies make selling such a bad product so central to their strategy?

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

The reason is simple. The high street banks have a very expensive branch network that collects and distributes cash, and it is all paid for by a "free" basic product the current account that is steadily facing more and more competition. In the past banks made the whole thing work by charging interest on loans, and fees for overdrafts. But as those markets became more competitive, it became harder to make the model work. So they turned to selling products such as PPI to maintain profits. It wasn't that they didn't realise the products weren't much good (after all, the banks drafted the small print). Or that they didn't care. It was simply that there wasn't any other way to make money.

The problem has got worse. In the last few years, competition has intensified. Challenger and app-based banks have captured a younger market with snazzy new features and offers. Hundreds of start-ups are muscling in to the market too, developing hyper-competitive products in niches such as international money transfers or processing credit-card transactions. Peer-to-peer lenders have marched into the main business of collecting deposits and making loans.

Advertisement - Article continues below

Perhaps most worrying of all, the technology giants are all edging into the financial-services market. Amazon already offers a current account, Google and Apple have sophisticated payment systems built into their phones, and Facebook is launching its own currency (admittedly with mixed results so far). Even Uber has this month launched its own credit card. It is going to be harder than ever to make any money in traditional retail banking.

The next PPI?




How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019

There are lots of reasons to be bearish – but you should stick with the bulls

There are plenty of reasons to be gloomy about the stockmarkets. But the trend remains up, says Dominic Frisby. And you don’t want to bet against the …
17 Jul 2019

Most Popular


What does the coronavirus crisis mean for UK house prices?

With the whole country in lockdown, the UK property market is closed for business. John Stepek looks at what that means for UK house prices, housebuil…
27 Mar 2020

Coronavirus: what it means for your mortgage or your rent

Ruth Jackson-Kirby looks at all the key questions for owners, renters and landlords affected by the coronavirus crisis.
29 Mar 2020
UK Economy

The UK’s bailout of the self employed comes with a hidden catch

The chancellor’s £6.5bn bailout of the self employed is welcome. But it has hidden benefits for the taxman, says Merryn Somerset Webb.
27 Mar 2020
UK Economy

Debt jubilee: will our debts be written off?

The idea of a "debt jubilee" – general society-wide cancellation of debt – goes back to Biblical times. Could it happen again? And would it really do …
28 Mar 2020