It won't hurt you to Smile

Unhappy with her local NatWest bank, Josie Fitzhugh changed to the internet bank Smile. Now a Which? survey gives it a "best buy" rating, says William Kay

The mailshot from the strange new internet bank caught Josie Fitzhugh at just the right moment. "I was with NatWest and I wasn't happy," she recalls, "I had the mailing from Smile before it was set up and it was promising interest rates I hadn't seen before."

Smile, the Co-operative Bank's internet arm, this week became the first internet-only bank to earn a "best buy" rating from Which? magazine. These new creatures have not had enough customers to win a high enough satisfaction score to be regarded as a best buy. But Which? has tweaked its rules – and up came Smile.

"Although Smile is still a comparatively small bank," says the magazine, "those of you who are customers give it the thumbs-up – 73 per cent of you are very satisfied with your account."

Unfortunately, Smile also scored high for mistakes, but this did not seem to matter with its loyal band of followers.

"I haven't found any mistakes so far," says Ms Fitzhugh, from Harlington in Bedfordshire, who has been with Smile since the beginning of last year and has a current account, savings account, Visa card and mini-cash ISA.

"I got something wrong a few months ago and the people on the phone were really polite!" Ms Fitzhugh is only saving with Smile at the moment, but she and her husband, Steve, are house-hunting so they will soon be applying for a Smile mortgage.

Smile is one of only four banks in the latest Which? survey to collect a "best buy" rating in three categories – credit, small overdraft and large overdraft. The others are First Direct Bank Account, Nationwide Building Society FlexAccount, and Halifax if you pay in more than £1,000 a month.

The competitiveness in the current account market was borne out this week by Alliance & Leicester. Despite having three accounts – Bank, Alliance and Premier – in the "best buy" table, A&L announced that from next Friday all current account customers will qualify for the lower interest rates traditionally reserved for pre-agreed overdrafts. A&L has abolished its unauthorised overdraft rate of 29.8 per cent (EAR) and replaced it with single rates as low as 9.9 per cent (EAR) as part of its drive to lure customers from its larger rivals. Barclays and Lloyds TSB have effectively cut their authorised overdraft interest rates recently because they have scrapped the set-up fees that went with those facilities.

Which? comments: "This may have a positive effect on how these banks are rated next year. If NatWest's experience is anything to go by, though, it takes more than that to make people happier. It dropped its fees in October 2000, and yet its satisfaction rating hasn't improved." Nevertheless, Which? reports that Barclays, HSBC, Lloyds TSB and NatWest still dominate the current account market, accounting for two-thirds of customers. This is despite the fact that the Big Four come bottom in terms of satisfaction.

The odd feature of the survey is that, just as Smile's high incidence of mistakes has not dented its satisfaction rating, so those efficient number-crunchers that do not make many mistakes are not rewarded by being placed top of the pops among customers.

Smile had three times as many mistakes as A&L, and the popular Nationwide had the biggest increase in the number of mistakes – up from 8 per cent to 14 per cent of respondents blew the whistle on it to Which? Meanwhile, Yorkshire Bank's errors were reported by just 3 per cent of Which? readers, against 11 per cent a year ago.

Smile's Ms Fitzhugh is among the one in five bank customers who prefer to use the internet as the main way of banking. Nationwide and First Direct customers are, next to Smile's, the most likely people to bank online.

A&L, Clydesdale, NatWest and its parent Royal Bank of Scotland and – ironically, as it was one of the pioneers of online banking – Bank of Scotland all lag in terms of persuading their customers to go online. Royal Bank, though, received a high satisfaction rating among its few online fans.