Loyalty? They can't bank on it

The process of shifting your current account to a more profitable haven is being simplified. The Big Four had better look sharp.
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The Independent Online

You are more likely to get divorced than you are to change banks - as the traditional banks never stop telling themselves. Things are probably about to change, and not before time. The Big Four - Barclays, HSBC, Lloyds TSB and NatWest - hold over 70 per cent of the market in current accounts, yet pay a measly 0.1 per cent interest. Customers who switch to one of the best interest paying current accounts available over the internet - such as that from IF (part of the Halifax group) - can obtain 5 per cent. If you hold on average just £1,000 in your account, that is worth £50 a year, compared with only £1 from one of the Big Four. But if your average balance is £3,000 - as it can easily be for a higher earner - then the extra income rises to £150 annually.

You are more likely to get divorced than you are to change banks - as the traditional banks never stop telling themselves. Things are probably about to change, and not before time. The Big Four - Barclays, HSBC, Lloyds TSB and NatWest - hold over 70 per cent of the market in current accounts, yet pay a measly 0.1 per cent interest. Customers who switch to one of the best interest paying current accounts available over the internet - such as that from IF (part of the Halifax group) - can obtain 5 per cent. If you hold on average just £1,000 in your account, that is worth £50 a year, compared with only £1 from one of the Big Four. But if your average balance is £3,000 - as it can easily be for a higher earner - then the extra income rises to £150 annually.

It is generally accepted, even within the banking industry, that inertia has kept customers loyal. A recent poll of its readers by Which? magazine found that while NatWest was the most heavily used bank, it was far from popular with its customers - only 39 per cent were very satisfied. The figures for Barclays and Lloyds TSB were barely better. By contrast, 74 per cent of First Direct's customers were very satisfied.

The major banks will have to quickly sharpen up or fade out. From the end of next year, the inertia factor should diminish thanks to an automatic and centralised system of moving direct debits and standing orders when customers change accounts. Gone will be the days when you had to laboriously change all those payments details.

In fact, we are already partly down that road. A pilot scheme is underway through which some banks (and one building society) will manually transfer all the direct debit and standing order details for new customers. So, if the interest rates offered by Nationwide, First Direct, Woolwich, Cahoot or Smile appeal, then you can transfer accounts with the comfort of knowing they will take the hassle out of the banking move.

Other banks which will do the same - but with less attractive current account interest rates - are Abbey National, Bank of Scotland, Barclays (on some of its accounts), Clydesdale, Co-operative, Coutts, Halifax, Northern, Royal Bank of Scotland, Ulster and Yorkshire.

Customers who commonly run an overdraft can also make major savings. The giant American Citibank not only pays healthy rates on its current accounts - 2.5 per cent on small balances and 4 per cent on balances over £2,000 - but it also provides a permanent overdraft facility of up to £500 free of charge. The bank has taken a 40 per cent increase in customer numbers in the last year, with the largest body coming from NatWest which has both a high interest rate on overdrafts, plus a hefty overdraft arrangement fee.

MoneyFacts calculates that a NatWest customer who uses an overdraft could save £182 a year by switching to Citibank. Unlike some other banks, customers can access its high interest current accounts by internet, phone, cash machine or through its four London branches. Citibank requires a deposit of £2,000 to open an account and customers must earn over £20,000. Some of the other higher interest accounts require larger deposits and minimum balances to earn interest - £5,000 in an AMC account earns 5.75 per cent and £2,500 in a Frizzell account earns 4.5 per cent.

Some of the best banking deals now available are restricted to internet access. This is no surprise given the massive savings available to the banks for customers who do not use the expensive branch networks - it is calculated it costs about 10 times more for a bank to service a customer who uses branches than one who uses the internet. These savings are beginning to be passed onto customers, and traditional banks encumbered with large branch networks are finding they must improve rates to compete.

Some banks are responding to market competition by establishing parallel internet-only brands, such as Halifax's IF and Abbey National's Cahoots. Egg - established by Prudential - only offers a savings account at the moment, but launches a current account next month promising one of the most competitive rates on the market. Another top interest rate internet banking facility is offered by first-e, backed by some of Europe's largest banks, but without overdraft facilities and with a debit card that is not widely accepted in the UK.

Nationwide's internet account, e-savings, has a high interest rate of 5.6 per cent, but no fancy new brand name. While it does not offer current account facilities, it runs in harmony with the Flexi-account current account (paying from 1.16 per cent to 2.2 per cent), enabling customers to achieve savings accounts rates with cheque book services - providing they are willing to spend the time on the net shifting money between accounts.

It is important to check fees before moving accounts, rather than just going for the most attractive headline interest rate. Avoid banks, for instance, which charge for using other banks' cash machines. And while Nationwide's Flexi-account is attached to a very good rate through its e-savings account, the downside is that its overdraft interest rate at 11.9 per cent is not the best on the market - although it is much better than those from Lloyds TSB and Barclays at 18.8 per cent.

Tight management of bank accounts is vital. An unauthorised overdraft may come with a hefty cash penalty, as well as an extra-high interest rate. Then there is the risk of maybe a £20 charge for a letter telling you off and a £30 fee for a bounced cheque.

Those who regularly overdraw their accounts may be well advised to consider moving to a flexible mortgage plus current account, such as those offered by First Active, Woolwich and IF. This is a much cheaper means of borrowing money than using an overdraft or a credit card, as the loan is charged at the mortgage rate. First Active is charging 6.74 per cent for the first year, IF costs 5.3 per cent for the first six months followed by 6.8 per cent, and Woolwich charges 6.7 per cent. The downside is that combined mortgage and current accounts are probably not a product for people with poor control over their personal finances. Some people will use the opportunity to raise their borrowing levels, with the result that they never pay-off their home loans.

A few years ago, another option seemed likely to take off which would enable customers to dispense with traditional current accounts altogether. The Co-operative Bank launched its Pathfinder Account, which paid an attractive rate of interest on a savings account that offered current account facilities, such as instant access cash withdrawals, debit card, standing orders and direct debits, but no cheque book.

While the Co-op's Pathfinder account still exists, its interest rates have fallen to 1.25 per cent for balances under £2,500, rising to a maximum of 4.62 per cent on sums over £100,000. The Co-op claims that Pathfinder is unique in providing current account facilities without a cheque book, in return for higher rates.

Until now, demand for products such as these has been small. Halifax spokesman Ian Beggs says: "Our research, which IF is based on, shows that people want to have their financial services products separate. Some would prefer a combined savings and current account, but the vast majority want them separate."

Several banks do offer savings accounts with debit cards, which can be used for cash withdrawals or payment for goods, but without direct debit or standing order facilities. Rates are fractionally below the best in the market - for example, Woolwich's Card Saver account pays 5 per cent. Other banks are reviewing their product ranges and may compete in this market. Bristol & West has a savings account with some current account facilities. This is not open to new customers, but it intends to reintroduce a similar product in the future. Birmingham Midshires also expects to offer savings accounts attached to cash and debit cards.

There are now many ways of getting decent rates from current account balances, and the advice to people whose accounts are only paying 0.1 per cent must be to move banks. This view is strongly endorsed by the Consumers' Association. "We have been campaigning for years to make it easier to switch bank accounts, because there are some really good deals out there," says CA's senior public affairs officer, Louise Hanson. "It is not as difficult as you think and you will save money if you move to a best buy current account."

But consider which bank account offers the right deal for you before moving accounts. "It is different whether you are always in credit or go overdrawn," says Ms Hanson. "If you overdraw you need to use a bank that does not charge fees and find one that provides the right limit for you. It is the monthly overdraft charges that you need to avoid. The Big Four completely dominate the current account market, but they are among the worst in customer satisfaction surveys and offer the worst current account deals you can get."

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