It’s been a tiring journey, in difficult circumstances, and the journey just keeps getting longer.
It seems it won’t end.
You’re tired and you need a break, to recover, to find relief, to be helped.
And you see an advertisement in the form of a sign. It suggests a place that has those things. Recovery. Relief. Help.
The first person you meet has a friendly face.
You want a place to deposit your stuff? Check.
Just sign your name here? Check.
You want the basic services that are offered? Check.
You need a couple of extra services? Check (he offers tailor-made solutions, how about that!).
The friendly face belongs of course to Norman.
Does Norman have a nice smile? Check.
Nice face? Nice place? Nice solutions? Check x3.
‘This is just what I needed’, you think. ’Thank goodness he accepted me’.
But what he and his place advertise is not REALLY what they offer.
You’ll find that out though. It’s not your fault; sometimes the clues are so subtle, so familiar, that they’re no longer noticeable.
Norman isn’t your friend. His place is not a friendly place.
Your bank has a lot in common with Norman.
A bank is not your friend.
When you are a ‘customer’ of a bank, you have a contract with what is usually a billion or trillion pound institution that charges you for the privilege. It charges you in interest payments and various fees. There is lots of fine print. Usually there are lots of contracts.
So you and your bank have a contract.
If they lend you money, you pay back that money. And you pay the interest on that money. And any fees applicable. And any penalties applicable. And so on.
Otherwise they take stuff from you, and activate horrors that you didn’t read in the small print. Because nobody reads all the small print.
Banks know that too.
For example, in various circumstances there are much higher interest rates than the headline interest rate that got your initial attention. You have to read the small print to see that. You were looking at Norman’s smile, but Mother was there all the time, in the background. In the small print.
So that help that they give? It’s not ‘help’. There’s a flipside. Contracts always have the flipside.
It’s a case of – ‘Here’s the help you asked for; here are the terms; and in those terms I can take stuff if you default’.
Contract. Not friendship.
So a bank is not your friend.
How does a bank get money, #1?
Banks borrow from the Bank of England by selling bonds to it. Individuals borrow from banks by exchanging their promise to pay for money to buy a house, car, or simply for a personal loan.
The total assets of UK banks in 2009 were nearly £7 trillion. In 2016 the big 4 banks (HSBC, Lloyds, Barclays and RBS) managed 75% of UK current and 85% of UK business accounts – holding £5 trillion in total assets between those four alone.
They didn’t get to those figures on the back of bad business.
What interest do banks borrow at?
Basically, just above 0% give or take. And this is how banks make money: the difference between nearly 0% and the % rate that we get charged (remember, that includes the eye-watering ones and not just the ‘headline’ or ‘friendly’ ones!).
That’s a MOUNTAIN of money. On trillions of pounds, it’s easy to make 100 or 200 billion in potential profits by doing very little indeed.
Do they worry about you Defaulting?
No, it’s of no consequence to them.
Because their business model already takes that into account. Very smart people with Master’s Degrees figured out how many people will default.
They simply sell off your bad debt, for example to investors. Hedge funds.
The hedge fund pays a few pence for every pound borrowed.
If you borrowed £1000 on your credit card, the bank sells it to a hedge fund for, say, £30. The hedge fund now has to collect from you. Hedge funds are not stupid – they buy at this kind of price because it’s great business.
So they’ve bought your debt for three pence for each pound. They might only collect, across the board, eight pence per pound. They outsource to collection agencies and law firms in or near your local area to collect from you.
So now, if the hedge fund gives the collection agencies two pence across the board, that hedge fund has made a minumum100% on their investment.
On scale, that mounts up to what any sane person would call ‘a result’.
It’s like free money for the hedge fund.
It’s also why such high bonuses and salaries – monstrous numbers – can be paid to Managers and Directors and such.
Have you seen the houses in which these people live? Have you not checked the properties that the banks are housed in? That prime real estate?
While you defaulted on your mortgage?
It doesn’t mean they’re really evil, like Norman (but in cases like the HBOS fraud scandal, they’re pretty evil…).
But it also doesn’t mean you deserve to be sliced and diced in the shower, worrying yourself to death over debt and default.
How does a bank get money, #2?
They actually borrow from you at very low interest rates – and lend it back and charge a higher interest rate.
No, I mean it, let’s look at it.
Your personal account – say the bank ‘gives’ you 0.5% on that. The reality is that THEY are borrowing from YOU.
At 0.5% – that’s competitively low!
When they ‘help’ you get a Mortgage at 3%, or 4%, or 5%, they make money. The difference between the 0.5% and the 3% or whatever.
Again, easy. Free money. All contracted.
It’s why banks have been around for so long.
Contracts have flipsides. Fine print. They don’t go away.
A bank is not your friend.
One last reason why your bank is like Norman Bates.
In the original book, Norman was fat, stubby and terribly unlikeable. His actions were not the result of psycho-physical damage, but blackouts brought on by heavy drinking. Marion Crane’s (Janet Leigh’s character) head was severed in the shower.
Alfred Hitchcock always knew that the best villains must be nice and attractive.
So do the banks.
So, after the PPI Scandal, the HBOS jail sentences, the Libor Scandal, after all the scandals – there will be more, still – have you noticed how all bank adverts have become very, very friendly?
Just like Norman.
Be careful out there!