It’s complicated! How banks pull the wool over our eyes if you don't keep things simple.

Beware innovation in finance – it usually means the bank has cooked up a better deal for itself – J Kenneth Galbraith

You’d be hard pressed to keep up with the tricks that banks get up to.

A reader once wrote in to say: “Bill, you might want to think again about that (recommending AIB’s regular savings account).”

He had opened an AIB regular savings account in January  and salted away €12,000 during the year. Then guess what happened?

“On 23 January (the following year), they quietly cut the eligible balance back to €1,000 (so anything above that gets just 0.15%).”

“This is typical of the way they try to take advantage of customers who don't watch what the banks are up to.”

“I wonder how many customers still think they are making (decent interest) on most of their money in these accounts?,” he fumed.

So what’s going on?

I asked AIB.

The customer was right. AIB’s deal is nowhere near as good as it looks.

Let’s say you lodge €1,000 a month.

The balance on which 3% rate applies goes up by €1,000 a month but only until it reaches €12,000 at the end of a year.

In month two, 3% is paid on €2,000, then €3,000 in month three – until it reaches €12,000 in month 12.

Then comes the catch – and it’s a big one. In month thirteen, the threshold goes back down to €1,000 for the whole account and the process starts all over again.

Talk about complicated! 

Grrrrr!!!! Nothing riles me more than banks pulling the wool over our eyes by adding complexity to products.

AIB is far from alone

To see through this sort of obfuscation we should always remember that the basis of our relationship with banks is that money flows from us to them or from them to us.

The more money goes to you - the less goes to the bank .

It’s hardly going to dream up products that give you more money.

Any innovations or complications it introduces will likely ensure that it takes even more money out of your pocket.

The problem is that we can’t – or can’t be bothered – understanding the terms and conditions and so the bank wins.

When dealing with banks, keep it simple. 

The best products are the ones where what you see is what you get.

In fact, complex financial instruments caused the last financial crisis as nobody seemed to know how they worked - or how much trouble they would cause!

Here are a few more to watch out for:

Car finance

When Personal Contract Purchases (PCPs) first came out as an innovative way to buy a car, a finance guy in a yellow sports jacket excitedly explained to me how it works at a seminar.

YELLOW SPORTS JACKET (YSJ): The buyer only pays for the depreciation of the car. After, say, five years, he’s paid off the depreciation and the car is worth €X000.

ME: So then he gets to own the car?

YSJ: (Pityingly) Eh…no. He gets to pay us €X000 - and then he owns the car. Or he gives it back and starts off all over again with another PCP plan.

ME: So it’s like renting a car? And paying interest on the rent…

YSJ: Well, if you put it like that…

ME: I have a better car finance plan. I buy a second hand car and drive it around until the wheels fall off, thereby minimising the horrendous depreciation, instead of paying through the nose for it.

YSJ sighs and walks off.

ONLOOKING JOURNALIST: Tskk, journalists! No class!

That conversation sums up how a banking innovation can cost us money. 

Banks would love if we never owned anything – just borrowed to pay off the devaluation of the assets we ‘rent’ from them!

And they’ll happily engineer products to ensure that we do just that – like PCP.

There’s more hidden complexity in the terms and conditions of PCP contracts that many people don’t even read.

Last week a reader told us how she was horrified to find a penalty clause based on mileage written into her PCP contract, (which, in fairness to the car finance firm, she hadn’t read).

She was already 13k over the 60k limit and now faces a massive penalty.

“I am both angry and upset as it could mean a €5k extra bill,” she said.

Insurance

The devil is always in the detail. And insurers often write complex details into policies that are geared in their favour.

Remember Payment Protection Insurance – the financial scandal of the century?

Banks sold this to insure your loan repayments if you got sick and lost income. 

But the terms in the small print, which few read, excluded people who received full pay when sick – such as civil servants.

It also excluded people with no income: students, pensioners, the unemployed, home carers – and even the self-employed.

Banks didn’t care and sold PPI policies to these people anyway even though they could never claim!

It’s not hard to work out why they were so keen - they were paid up to 80% commission by the insurer. How much value is in insurance when four fifths of the value of your premium goes to the seller?

Buy insurance when you have to cover your car or important stuff like your home or your family’s health.

But don’t buy gimmicky small ticket insurance for things like gadgets or mobile phones. 

Your chances of getting your money back in a claim is minima.

You’re probably better off saving what you would have spent on premiums and use this if ‘disaster strikes’ and you drop your mobile phone down the loo!

Mortgages

Again, keep it simple. The best value mortgages are the ones without the gimmicks. That means AIB’s rates of 3.1%-3.3%. 

Any complexity or gimmick will, as usual, work in the bank’s favour.

For example, mortgages that give you cash back have the dearest variable rates. The cash looks tempting but you will end up paying tens of thousands extra over the lifetime of the mortgage.

Credit cards

A credit card that pays you money every time you buy something sounds too good to be true. 

It isn’t quite untrue but this is just another misleading gimmick, i.e. complication. The interest you earn is miniscule compared to what you pay on overdue amounts.

Bank charges

Banks love offering gimmicky bank accounts, because people get more worked up about these charges than far more financially significant outgoings such as mortgages.

Bank charges can be €60 a year while mortgages can be 200 times dearer. 

PTSB, the expert at this sort of marketing wheeze, offers an account that pays you money when you spend. 

But it’s capped at a less-than-awesome €5 a month.

What they’re really after is your mortgage business which could earn it €100k in high interest payments.