Responses to my LinkedIn post on #banking clearly shows that I am not the only one feeling this. Let me add the next chapter to the banking saga.
Retail banks are in the business of accepting deposits and lending money. Due to historical reasons, such as redeployment of, operational costs and others, when you want to exit a long term commitment with the bank there is a penalty applied. Whether it is to break a fixed deposit or prepay a loan. However these practices are antiquated and need to be done away with.
Redeployment of the money
It was painful when the banks had actual currency notes to redeploy it. With almost all money in banks being electronic, the bank can move money from 1 branch in Dispur, Assam to another branch in Bhuj, Gujrat in seconds. Thus there is very little friction to moving/redeploying funds. And any funds left with the bank at the end of the day is lent to another bank, so no money is idle.
Gone are the days where to repay a loan or break a deposit, a bank clerk would need to compute the interest to the day and write out a pay order or accept a deposit. Operational costs on digital channels are approaching zero and in branch is also negligible. The cost of reassigning the collateral is the same whether done at the end of the term or in between.
However, these are antiquated practices, which banks still continue, since it brings in money. For e.g. for prepaying an auto loan, you end up paying 1 year of interest! That’s sweet income for the bank.
We do hope that some fintech or new age banks will break these practices. However, not everything is rosy in the #fintech land. In my next post I will talk about the data privacy issues and hidden fees of fintech players.