Banks taking on overdrafts in battle for new customers: Cut-price rates are putting pressure on competitors to follow suit. Caroline Merrell and Nic Cicutti report

BANKS and building societies are so keen to woo customers from competitors that they are willing to allow you to move your overdraft.

Overdraft rates are being cut by the relatively new providers of current accounts to win new business.

Woolwich Building Society followed Abbey National's lead this week and dropped its overdraft rates to a record low of 9.8 per cent APR.

Woolwich will treat each application for a transfer of an overdraft on its merits.

The new rate makes Woolwich the cheapest provider of agreed overdrafts, with Abbey National just behind at 9.9 per cent APR. Halifax also cut its rates recently to 12.4 per cent APR.

Abbey National will allow transferring customers to move an overdraft, provided they have bank statements covering six months that prove they are sensible with their accounts.

It puts mounting pressure on other banks and building societies to follow suit.

More than 2 million current account customers with all three institutions will now pay at least 50 per cent less for their overdrafts than those who stay where they are.

Peter Robinson, managing director of Woolwich, said: 'This reduction will maintain the competitive stance of the Woolwich. It is a further indication of the favourable effect that building societies are having in reducing the cost of banking services.'

Competitors claimed that Abbey National and Woolwich's cuts were possible only because they have negligible amounts of outstanding overdrafts.

Abbey's 60,000 overdrawn current account holders, out of 1.5 million, owe an average of pounds 200 to pounds 300 each. Woolwich has 360,000 current account customers, and Halifax has 750,000 Maxim accounts, compared to 7 million who bank at Barclays and owe a total of pounds 800m in overdrafts.

Alliance & Leicester, which launched a new current account this week, said it would not try to match Woolwich and Abbey National.

'That does not mean we would rule it out completely. We would want to remain competitive and if all the others matched that rate then we would be uncompetitive,' a spokeswoman said.

Alliance & Leicester considered offering a cash-backed transfer guarantee on the new account along the lines of the deal from Midland Bank announced this week.

But the society felt that a small number of people might abuse the system. Anybody who wants to transfer to the Alliance account will be given forms for transferring their account and standing order instructions, another for switching direct debits, and one for their existing bank.

People wanting to transfer between other banks should get the relevant transfer form from their existing bank.

Transferring a direct debit is more complicated as a direct debit is an arrangement between the customer and a third party, not the bank. So it is up to the customer to arrange the transfer.

A Lloyds spokeswoman said: 'There seems to be an assumption that banks make huge amounts of money from overdrafts.

'In fact, overdrafts are an extremely expensive form of unsecured loan for a bank. Unlike a standard loan, they involve totally unstructured lending, with no organised form of repayment. They involve huge administration costs because they have to be constantly monitored.'

Lloyds offers a Gold service with rates down to 11.3 per cent APR for selected clients earning over pounds 20,000.

National Westminster said it had no plans to cut its rate.

Between 20 and 30 per cent of NatWest's 6.5 million customers are overdrawn in the course of the year.

A bank spokesman said three-quarters of its overdrafts were at 10 per cent APR or less because it was possible to negotiate the amount to repay.

This week Midland threw down the gauntlet to the other banks by offering a cash-backed guarantee on transfer. The bank will pay transferring customers pounds 10 each time it breaks the transfer pledge.

Midland guarantees to supply the customer with a cheque book within five working days, to provide a cheque card within five working days, provide a PIN number within seven working days and pay all authorised standing orders and direct debits when the account is opened.

It will allow customers to transfer overdrafts, and is also offering new customers a free overdraft for two months, which will enable them to use their accounts immediately, before their next salary cheque is paid in.

The other banks will allow people to transfer their overdrafts, subject to negotiation.

The main banks said that they aimed to transfer accounts within the same time scale as that guaranteed by Midland.

Midland is backing the transfer guarantee with a number of incentives for new customers. It is waiving the pounds 12 fee for taking out Visa and Access cards for the first year; offering a 2 percentage point discount on the APR on loans between pounds 500 and pounds 10,000, and giving free home insurance for one month.

More than 8 million people are dissatisfied with their bank accounts, but less than 700,000 people each year go through the process of transferring to a new bank.