Has it just got cheaper to go into the red?

Whatever the motive, the move by a high street banking group to slash bank charges is good news for us all
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The Independent Online

NatWest and RBS stole a march on their rivals this week by announcing plans next month to cut penalty charges for unauthorised borrowing. The highlight was the slashing of the cost of bouncing a cheque, which falls from a stinging £38 to just a fiver – a much fairer charge. However, as always, the cuts are not as simple as they first appear and anyone going into the red with the bank's permission is still likely to be left with a hefty bill.

But any cut in charges is good news and the hope is that the other major high street banks follow suit and reduce their penalty charges to a more reasonable level. Even if they don't they may be forced to do so by the outcome of a long-running court case challenging bank charges, which is due to move into its next phase in October when the House of Lords publishes its decision on the banks' appeal against an earlier ruling.

It's probably no coincidence that NatWest and RBS decided to cut their rates now ahead of the case and its certain publicity. However, the bank says the lower charging structure has been driven through by new UK retail bank chief, Brian Hartzer, who took out a series of full-page ads in newspapers this week to pass on his view to bank customers.

"Fees for unarranged borrowing have been an area of ongoing concern for customers," Hartzer says. "As we look ahead there are many issues to consider, but we thought it was time to move this particular customer concern forward by cutting our charges."

Let's assume it is true that the bank is responding to customer concerns rather than simply trying to garner some positive publicity; should the new charging structure make you consider switching bank accounts? If you don't go overdrawn it won't make a jot of difference to you. If you do, and regularly, then you really should look at ways of cutting down the costs of doing so and switching accounts is clearly one alternative.

Looking at NatWest and RBS's new charges, there is good and bad news. The new lower charge for unpaid items – bounced cheques, or returned direct debits and standing orders – will be £5 for each item from 1 October, up to a maximum £50 a month. It is currently a staggering £38, or up to £114 a day. That is clearly a rip-off charge, proved by the bank's new lower-fee stance. You can bet they have carefully worked out that they can still make a decent profit on the new rates, which means they have been making excessive charges up until now.

That is the essence of the current court case – and a long-running Independent campaign. We estimate that overdraft fees cost current account providers no more than £2.50 each to process. At that rate, even the new fiver charge means they're making a tidy turn on the deal.

The bank charges court case – which has so far been rumbling on for around two years – has been, for some months, focused on assessing whether the Office of Fair Trading has the power to decide if the banks' current terms and conditions are fair. It first came to court in January 2008 and, in April last year, the judge found in favour of the OFT. The decision was upheld by the Court of Appeal in February this year while House of Lords heard the banks' appeal against the decision in June and will announce its ruling in October.

However, assuming that the House of Lords rejects the banks' appeal – which looks likely – the whole process starts up again as the OFT then has to decide whether banks' charges are unfair. If it does decide to take the banks on then there could be months of legal arguments to come. However, if the OFT wins, it could open the floodgates for millions of bank customers to claim money back from their banks. Indeed, Tory leader David Cameron said last month he is considering a plan to bring in automatic payback of overdraft charges if the courts back the OFT ruling.

In the meantime, reclaiming bank charges has been on hold in most cases. Since the process started, more than a million claims have been lodged by people hoping the floodgates will re-open. About £1bn was paid out to charges' victims before the delays began.

It all suggests that millions of us end up being stung by penalty fees and charges. Clearly, going into the red can often be avoided by better financial planning and budgeting, and even simply informing your bank that you need an overdraft may cut back the costs. In that case it's worth choosing a current account which charges the least for arranged overdrafts. If you don't think you are able to control your spending enough to avoid the penalty charges, then you should switch to an account with the lowest charging structure.

Is that NatWest and RBS's new deal? Apart from the bounced cheque charge, the other reductions are not so generous. The bank's charge for paying items – such as mortgage repayments – will halve to £15, while customers who make a payment using a cheque guarantee charge while overdrawn will be charged £15 instead of the current £35. The maintenance charge will reduce to £20, from £28.

The bank has also cut its unarranged borrowing interest rate to 19.24 per cent, the same as the cost of an agreed overdraft. However, that move is simply them falling into line with other banks, points out David Black, banking expert at Defaqto.

"Over the past couple of years there's been a move among the main current account providers to reposition their current account overdraft offerings. HSBC, Lloyds TSB and Nationwide have already moved to the situation where they don't differentiate in terms of the interest rate they charge on authorised and unauthorised overdrafts. NatWest's move follows this trend," says Black.

The Independent's Money Insider, Andrew Hagger of Moneynet.co.uk (see his column this week on page 57), says the monthly maintenance charge still stands out as not being in the best interests of customers, despite the bank's new boss Brian Hartzer banging on about his desire to please customers.

"It still seems a bit over the top to charge a £20 monthly maintenance fee on top of all the individual charges, it's almost like double charging," Hagger says. "It's the sort of thing that really gets customers backs up. There will undoubtedly be arguments whether the charges have been reduced sufficiently, however the OFT cap of £12 placed on credit card charges in spring 2006 provides a bit of a benchmark as to what level of charge is deemed acceptable."

He points out that there have been changes to charging structures of some of the other banks in the last few years, such as Barclays with its Personal Reserve, but none quite as drastic as this move from NatWest and RBS. "I'm not sure if others will follow. I expect they'll wait for a decision on the bank charges case."

So delaying switching until after that decision is announced may yield a better view of the best deals then available for you. For the moment check out our table of the bank's current accounts. But also heed the words of Lovemoney.com's Ed Bowsher.

He says that if banks end up getting less money from overdraft charges, they will want to boost their profits elsewhere.

"RBS will lose revenue as a result of these cuts. So how will they make up the loss?" he asks. "The most obvious solution would be to move customers away from free current accounts. I expect more "premium" bank accounts will be launched across the industry, and they will all include a monthly fee."

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