Four per cent doesn't add up to much

Halifax has opened a new front as the banks battle for customers

As the traditional high-street banks respond to the threat of new internet upstarts by introducing more competitive rates on accounts, the temptation for customers to switch providers should be huge.

As the traditional high-street banks respond to the threat of new internet upstarts by introducing more competitive rates on accounts, the temptation for customers to switch providers should be huge.

But when it comes down to it, few of us can be bothered. Changing current accounts, in particular, is seen as being notoriously difficult. According to research from Abbey National, only 5 per cent of us are prepared to go to the effort of switching - changing standing orders, direct debits and informing the payroll - just to get a little bit more interest.

Despite this evidence of our apathy, the Halifax last week announced that it will pay 4 per cent interest on its current account from January, a significant increase from its current rate of 0.5 per cent. This will make the Halifax's current account the best-paying of its kind on the market, comparing very favourably with the big four high-street banks - Barclays, HSBC, Lloyds TSB and NatWest - which each pay 0.1 per cent interest.

James Crosby, chief executive of the Halifax, says the move will cost £50m in extra interest, as half of the bank's two million existing current account customers are expected to switch. Yet he hopes that the rate will also attract many new customers from rival banks, particularly the big four: they will be encouraged to take out other Halifax products, such as mortgages, personal loans and individual savings accounts.

If it sounds too good to be true, that's because it is. Customers qualify for the 4 per cent interest if they meet the account's criteria and pay in £1,000 a month or have a credit balance of at least £500. But if they need an overdraft, there is a £5 monthly charge. And if they slip into the red without permission, there's a £28 charge on top of that.

The Halifax set the minimum investment criteria on the basis of research from the Office of National Statistics. This indicates that the average net monthly salary is £1,200, suggesting that the majority of people will be able to meet the basic minimum.

Even if they do qualify for the higher rate, though, customers won't end up with that much more money in their pocket. A £1,000 balance in a current account paying 4 per cent interest would earn approximately £2.60 a month after tax, or just over £30 a year. And if the average salary is £1,200 a month, most people are unlikely to keep £500 in their current accounts from one pay day to the next.

Banks have traditionally paid low interest rates on current accounts because they are expensive to run. Gordon Maw at Virgin Direct argues that while the increase makes little difference to the average Halifax customer, it will cost the bank a lot of money to make the gesture.

This is why other banks seem reluctant to increase their own rates of interest. "We pay the same 0.1 per cent to customers regardless of the amount they pay into the account," says a spokeswoman for Barclays. "A current account is transactional, so it is not meant to have large amounts of money in it."

Few customers consider the rate of interest on offer when picking a current account, anyway. Even though the high-street banks have been offering just 0.1 per cent for some time, around 65 per cent of us still bank with them. Research from Virgin One reveals that our choice of bank has nothing to do with the rate of interest on the current account. If we want higher interest, we shift any remaining money into a savings plan.

Current accounts, on the other hand, are used for paying bills and the mortgage. People tend to choose a bank because it has a branch close to where they live, or because their parents banked there, or following a recommendation from friends or colleagues.

"Service counts," says Janet Connor, director of banking at Abbey National. "How many errors the bank makes is a key point which this [rate rise] is not answering."

As you are unlikely to be that much better off if you switch accounts, it is probably not worth the hassle involved in moving your money. However, this should become easier over time, with a number of banks beginning to offer dedicated switcher services, whereby your new provider changes direct debits and standing orders for you. The Government is also demanding that banks make it easier for customers to switch accounts from next year.

* Contacts: Abbey National, 0800 100801; Barclays, 0800 400100; Halifax, 01422 333333; HSBC, 0800 520420; Lloyds TSB, contact local branch; NatWest, 0800 200400.