Current account changes mean end of free banking
Free accounts are now outnumbered by paid-for ones and could disappear altogether within three years, reports Simon Read
Saturday 12 June 2010
Paid-for current accounts are growing in popularity. Not necessarily with customers, but definitely with the banks. In fact, the number of accounts banks offer that charge a fee has grown by 94 per cent over the last four years, according to figures from analysts Defaqto. At the same time the average monthly fee has soared by 42 per cent.
But the biggest signpost to the way things are going in the current account market is the fact that there are now more paid-for accounts than there are free ones. Defaqto says There are now 64 paid-for packaged current accounts available compared to 61 standard free current accounts.
While there may be a rationale for some people to pay for their banking, for most of us a plain ordinary free account will do fine. But the banks don't want us to have them, which is why they're launching more and more different deals designed to persuade us to switch. Their plan is simply to consign the notion of free banking to the dustbin. And experts suspect they'll succeed, even within the next couple of years.
"We're edging towards the ending of free banking," predicts David Black of Defaqto. "Banks are softening people up with a range of added-value accounts. I reckon free banking could disappear within the next two to three years."
Andrew Hagger, of Moneynet.co.uk, agrees. "The end of free banking seems to be drawing ominously nearer as the banks continue to focus on revenue-driven packaged accounts," he says. In other words, the banks want to make money on the accounts they offer, rather than using current accounts as a loss-leader to sell other services to us.
On one hand, that's fair enough. There are costs involved in running a current account so why shouldn't we pay for them? But, as ever, banks are using slightly underhand tactics to persuade us to open their fee-paying accounts. A link to a high-paying savings account, for instance, can look a good deal. But when you realise the relatively small amounts you can lock away in the high-paying accounts, many people may actually be better off elsewhere.
It's generally accepted that people are more likely to leave their partner than switch their bank account, but it's time to change things. Switching accounts has never been easier (see box right), and doing so can lead to savings. "However, choose an account that's right for you for the long term rather than being swayed by short-term offers of credit interest on your account which will all but disappear after 12 months," says Hagger.
The problem for anyone comparing current accounts these days is that there are a range of different ways of charging. So just looking at APRs and penalty charges isn't enough. You need to find out whether you need to pay in a minimum monthly amount to qualify for an account. The criteria can vary quite widely. For example, the Barclays Bank Account and Nationwide Building Society Flex account have no minimum, while Santander and Halifax require £1,000 per month and First Direct £1,500.
"You also need to understand how much you'll be charged for dipping into the red," says Hagger.
"For unauthorised borrowing you can pay interest rates ranging from 12.9 per cent to almost 30 per cent, however to confuse matters even further some banks charge a set daily fee instead of interest."
Alliance & Leicester, for example, charges 50p per day while Halifax charges £1, or £2 if the overdraft rises higher than £2,500.
Meanwhile, unauthorised interest rates can be as high as 28.7 per cent with Santander, while the monthly fee that some banks charge on top ranges from Santander's £25 to Lloyds TSB's £15 and £20 with NatWest, RBS and Nationwide. Against that Barclays charges a £22 personal reserve fee per five-day period. Which is cheaper? It's very difficult to work out.
If you don't go into the red and are attracted by some of the "extras" that the paid-for accounts offer, how can you work out which is best? "People need to examine the level of benefits offered closely to ensure they are choosing a product that's right for them," advises Black. "Some of the travel insurances offered, for instance, are good for older people, who may have difficulty tracking down reasonably priced cover."
What other extras are offered? The most common is commission-free currency, which is offered on nine out of 10 accounts, closely followed by travel insurance which are included in eight out of 10 accounts. Four out of five offer deals on special high-rate savings accounts, while many offer phone insurance or motor breakdown cover.
Moneysupermarket research suggests that the most popular reason for switching current accounts is for a better in-credit interest rate. But there could be other financial reasons for switching. Nationwide, for instance, offers hard-to-find 90 per cent mortgages to customers of its free Flex account, which could be attractive to first-time buyers.
Is it time for a campaign for free banking? It seems likely banks will find a way to charge us one way or another, so switching to get the best value now could prove a wise choice later.
* Switching accounts is much simpler than you may think. Banks have been forced by regulators to speed up the process and not put barriers in people's way. In fact many banks now employ dedicated teams to manage the switching process. "So there's no excuse for paying for an account that doesn't work for you or for putting up with poor customer service," says Andrew Hagger of Moneynet.co.uk. "Vote with your feet and start looking after your own bottom line." ......... Bacs, the company behind direct debit, says its research shows that four out of five people switching or attempting to switch their bank or building society within the last five years have been ......... satisfied with the overall process.
Bacs' Family Finance Tracker research also shows that nearly a third of Britain's adults have switched the bank or building society where they hold their main current account, with 70 per cent of people saying they did not experience any problems during the process. A fifth of adults switching or attempting to switch actually did so within the last 12 months. Mike Hutchinson, head of marketing at Bacs, says: "Switching bank or building society accounts is a simple process which people should not be frightened to embark on."
Information on switching your bank account is available on Bacs' website. There's also a useful step-by-step guide, designed to answers people's most frequently asked questions.
Copies of the Bacs' Account switching guide are available to download from: www.thesmartwaytopay.co.uk/accountswitching
Independent Partners: See how much you could save by switching credit cards. Compare now
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