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Spend & Save

Free banking expected to decline

Banks are set to slash their "free" account services as they struggle in the worsening economic climate, customers were warned yesterday.

There is set to be a "dramatic decline" in free banking as the credit crunch rumbles on and banks face potentially billions of pounds worth of losses related to penalty charges and payment protection insurance (PPI), according to Professor Merlin Stone, of the Bristol Business School. "It is clear more fees will be charged for banking services, fewer will be free," he said.

Professor Stone said the current crisis surrounding banks in the UK will lead more to copy the model adopted by the rest of Europe. "The credit crunch is putting more pressure on companies, especially those in the financial services sector, to protect and grow income streams," he said. This included luring customers off current accounts that have no monthly charges, to ones that do in return for "concierge-style" services. This could range from booking theatre tickets to help for customers travelling abroad.

Last March, there were 33 current accounts with overdrafts that had monthly or quarterly fees. Less than 10 months later, that had risen to 40. Over the same period, the monthly average fee had increased from £11.50 to £13.16, or more than £150 a year.

Mortgage fees have gone the same way. The average fee for a "best buy" five-year or longer fixed-rate mortgage has risen from £648 to £996.75. "People now realise that there is no such thing as a free lunch. They have taken much for granted in the past," said Professor Stone, following the release of the report commissioned by WhiteConcierge.

UK banks currently earn about £8.2bn in revenues from personal current accounts, with £2.6bn coming in overdraft charges. However, these are under threat after the High Court last year ruled that the Office of Fair Trading could decide if the levying of penalty fees was unfair. The case followed a campaign against unfair banking charges launched by The Independent. The seven banks, and the building society Nationwide, immediately appealed and are awaiting the outcome.

Last week, the Competition Commission ruled that PPI policies should not be sold at the same time as a loan. This would allow consumers to shop around.