Advertisement

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
Snazzy new tech is eating the banks' lunch

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?

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

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.

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?

Advertisement
Advertisement

Recommended

How long can the good times roll?
Economy

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
Stockmarkets

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
Economy

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
Listed companies are dying out, and that could have serious consequences
Stockmarkets

Listed companies are dying out, and that could have serious consequences

Private equity is taking over from public stockmarkets as the biggest provider of capital to companies. That’s bad for investors and bad for society a…
3 Aug 2020

Most Popular

Can the recent rally in sterling continue?
Sponsored

Can the recent rally in sterling continue?

A "double top"  – a very recognisable pattern – is forming in in the US dollar. Dominic Frisby explains what it is, and what it could tell us about st…
3 Aug 2020
UK banks have had a shocking week – so it’s probably a good time to buy
UK stockmarkets

UK banks have had a shocking week – so it’s probably a good time to buy

Lloyds Bank reported a £676m loss this week. And, with all of the UK's high street banks having a terrible time of things, bank stocks are detested ri…
31 Jul 2020
Gold bugs' dreams are coming true – but we could still see a V-shaped recovery
Gold

Gold bugs' dreams are coming true – but we could still see a V-shaped recovery

John and Merryn talk about how it's perfectly reasonable to expect a V-shaped recovery and to continue holding gold as well. Plus, inflation, staycati…
30 Jul 2020