The market in bank current accounts is not working well for customers, a study from the Office of Fair Trading (OFT) said today.
A "significant" number of customers do not know how much they pay in bank charges, either before or after they are incurred, the OFT said. And the complexity of current accounts makes it "extremely difficult" for customers to compare their account with others.
OFT chief executive John Fingleton said: "Personal current accounts are a vital gateway to effective participation in the economy. But this market is not serving customers well."
The OFT said UK banks earn £8.3bn in revenues from personal current accounts, including £2.6bn in overdraft charges.
Another £4.1bn is earned from net credit interest income - or interest that account holders should be earning but which is going to banks.
Personal current accounts hold a combined £100bn, the OFT said.
The study comes in the wake of the OFT's recent High Court victory on the issue of unauthorised bank overdraft charges, which paves the way for a second hearing to decide whether the charges are unfair and what a fair charge should be.
Banks have appealed against the verdict, and the second hearing will be delayed until this is settled.
The OFT said today that banks earn an average of £152 per active personal current account, but some customers end up paying much more due to "opaque" charging information.
"The complexity and lack of transparency of personal current accounts makes it extremely difficult for individual customers to compare their bank account with other offers," the watchdog said.
"A further result is that a minority of customers end up paying much more for their current account than others."
The OFT calculated that 1.4 million people paid more than £500 per year in charges. "This can often mean potentially 'vulnerable', low-income and low- saving customers paying more as a result of incurring insufficient funds charges."
Mr Fingleton said: "Customers lack the information they need to choose the best deal, and this in turn weakens the banks' incentives to compete.
"There is much the banks could do to improve how the market works, and we hope this report will encourage them to take steps to do so in the near future."
The OFT's study found that more than 12.6 million current accounts - about 23 per cent - incurred at least one insufficient funds charge in 2006. The average daily unarranged overdraft balance on UK accounts during that year was £680m, it added.
More than a fifth of consumers were unaware of insufficient funds charges until they had incurred one, the OFT found.
Also, 88 per cent of active current accounts, or 47.6 million accounts, received an annual interest rate of less than 0.5 per cent in 2006.
Altogether, current accounts generate more revenue for banks than savings and credit cards combined, the OFT said, bringing in 31 per cent compared with 17 per cent for savings and 13 per cent for credit cards.
The watchdog said: "Overall, the report finds that the personal current account market may be stuck in an equilibrium that does not work well for consumers.
"Limited understanding of key account elements, combined with low confidence in switching, means that banks have less incentive to provide better offers on charges and interest."
Unauthorised overdraft fees can be as much as £35 for a single bounced payment, although campaigners claim the cost to the banks could be as little as £2.50.
Annual results for the major high street banks show they have so far paid out more than £559m in refunds to customers who complained about unauthorised overdraft charges.
A spokesman for the British Bankers' Association (BBA) said the report was being studied, but added: "We are disappointed that the report presented only revenues without taking into perspective any of the costs being incurred in respect of running accounts."