New research reveals British consumers in the dark as to how Banks make money from them

Independent consumer research carried out by Ipsos MORI, sponsored by leading peer-to-peer lender Zopa, has revealed the extent to which the British public is in the dark when it comes to how banks make money in the retail market. The research revealed that a startling 93% of UK consumers aged 18 or over do not know what a ‘bank spread’ is and that even amongst those who thought they did know, less than half actually did.

When the bank spread concept was explained and a figure of 11% given for a typical current spread, the research revealed that only 28% of people were comfortable with banks making money in this way, and 58% said that they thought the current typical spread of 11% was too high.

The research was carried out by Ipsos MORI over the last month via 470 face-to-face interviews with a cross section of the UK population aged 18 and over. The findings have been weighted by Ipsos MORI to reflect a nationally representative picture.

In terms of what consumers would like to see, the research identified some strong feelings. A large majority (80%) agreed with the statement  “Banks should state clearly what their current spread between their typical personal loan and typical savings rate is, for example in branches and online” Furthermore, 73% of people agreed that “the Government and regulators should put rules in place that control the size of spread that a bank is allowed to apply.”

Giles Andrews, CEO and cofounder of Zopa said, “The difference in rates obtained by lenders and borrowers is, clearly, fundamental to the banking industry because that is where their profit lies.  But this research reflects public concern that the traditional lending institutions are ripping their customers off and keeping their customers in the dark about the process and the extent of the rip off.  It does not have to be this way. We at Zopa have shown that peer to peer lending, conducted in a transparent manner, works better for everyone.  Borrowers can get access to much lower rates, individual lenders can secure returns greatly in excess of savings accounts and Zopa can take its low charges, all within the spread, leaving everyone much better off than if they had gone to a bank. The high spreads currently being inflicted by banks have served to make peer-to-peer lending an even better deal for the consumer. It is just rather tragic that more people don’t even know about bank spreads and the measure they provide of just how much the banks are taking from them and their fellow customers.”

“When the Government reflects fully on the Independent Banking Commission’s recent recommendations, we implore politicians to address the many fundamental issues that continue to undermine any chance of real consumer-driven competition in the banking sector, starting with the public being kept in the dark as to how and where banks make money from them.”

Last month Zopa passed the £150 million milestone in loans arranged and is marking the event with a special discount for borrowers which applies on all loans taken out before the end of September.  The discount reduces the fixed fee paid by borrowers from £130 to £100 per loan, and is reflected in the APR.  On a typical loan of £5000 taken out for 3 years at current rates, this discount will reduce the APR from 8.4% to 7.9%.

At Zopa, ordinary people bypass the banks by lending money to other creditworthy people at rates that they agree between themselves. This enables both borrowers and lenders to get a far better deal than they would get from a bank. Most borrowers at Zopa can access a loan at least 20% cheaper than they can get from a bank, whilst lenders have enjoyed radically better returns than they could get from savings accounts. The average return enjoyed by Zopa lenders over the last 12 months has been 6.8% p.a. (after charges but before any bad debt).

The key findings from the Ipsos MORI research sponsored by Zopa were as follows:

1. 93% of consumers do not know what a Bank Spread is.
2. Of those that say they do know, less than half actually do.
3. When told that a typical Bank Spread is currently 11% (source: Moneyfacts, between savings account interest rates and rates charged for personal loans), a total of 58% of people think that is too high (38% think it is far too high).

Explanation of the current typical Bank Spread was given as follows “Currently the typical UK bank spread is 11%, where personal loans are concerned.  Currently borrowers are typically charged 12% interest on personal loans and savers are typically paid 1% interest on their savings deposits.”

1. 41% of people disagreed with the statement “Banks are commercial organisations which need to make money so I am comfortable with them doing so in this way”.
2. 80% of people agree that “Banks should state clearly what their current spread between their typical personal loan and typical savings rate is, for example in branches and online”.
3. 73% of people think “the Government and regulators should put rules in place that control the size of spread that a bank is allowed to apply.”

Ipsos MORI conducted 470 interviews between 26 August and 1 September 2011. All interviews were conducted face-to-face, with those aged 18 and over as part of Ipsos MORI’s Capibus survey.  Data are weighted to the general population of Great Britain.