'Price war' could see the end of free banking

Moves to attract new customers may have a sting in the tail, warns Chiara Cavaglieri

Now that switching should be easier and quicker, many banks have been polishing up their current account offers to attract new business.

The latest move has come from HSBC, telling customers it will scrap unpaid transactions fees of up to £25 on its current accounts. Other banks have introduced cashback incentives and in-credit interest, but could these improvements be a prelude to monthly fees on all accounts and an end to free banking?

All of the 9 million current account customers at HSBC and first direct (owned by HSBC) will no longer be charged a fee if their bank declines a transaction due to insufficient funds, as of next Sunday. Any charges incurred up to that time will still be payable, starting from a £10 fee for transactions up to £25 and a fee of £25 for transactions in excess of £25, but this move has been promoted as the first step towards a more straightforward overdraft service with further changes to be announced in 2014.

"In the past two years most banks have moved to reduce their unauthorised borrowing charges and unpaid item charges," says HSBC spokesman James Thorpe. "Our objective is to find a structure which blends simplicity and transparency with value for money."

Ditching unpaid transaction fees will be welcome news to customers – it is difficult to stomach being charged for something that the bank hasn't actually had to process. Halifax has already scrapped fees for unpaid transactions, but otherwise, all of the big players hit customers fairly hard and until it is removed next week, HSBC is one of the worst offenders charging £25 for unpaid transactions along with the Santander Everyday account. The FlexAccount from Nationwide Building Society also stings customers with a £15 fee per item and Lloyds charges £10 per item (up to a maximum of three per day).

Current accounts have been enjoying the limelight since the new, seven-day switching guarantee scheme came in last month, and providers have been cranking up their marketing ploys by improving their accounts with added benefits such as cashback, interest or even streamlining their overdraft fees.

Clydesdale and Yorkshire Banks have launched a new current account paying 4 per cent interest on in-credit balances of up to £3,000, for example, although this rate falls back to 2 per cent after 31 March 2015 and you need to deposit at least £1,000 a month to benefit from this interest. Halifax customers now earn up to 15 per cent cashback at certain retailers with the launch of Cashback Extras, and its sister-bank, Lloyds, will also offer its online-banking customers up to 15 per cent cashback for purchases at various retailers including Argos, Homebase, Morrisons and Ocado when "Everyday Offers" comes into play at the end of the month.

Renewed competition in the market is great news, but there is a concern that these improvements could be a stepping stone for banks to spread the cost to the wider current account base and potentially start introducing monthly fees.

Charlotte Nelson of Moneyfacts.co.uk says: "With all these features being added to the accounts it appears that providers are heading towards offering a more-tailored approach. However, customers need to be aware that by banks doing so it can be at a cost either in an account fee or charges elsewhere."

Aside from packaged accounts, which cost up to £300 a year for various perks such as travel insurance and car breakdown cover, we are all used to fee-free banking services. Despite this, anyone who has used an overdraft would scoff at the idea that they don't have to pay for banking. Stealth charges and confusing tariffs have been one of the biggest gripes against the banks over the years and many continue to levy considerable penalties.

A number of fees can come into effect with standard banking including unpaid fees, usage fees and arrangement fees, on top of any interest charges for overdrafts, making it extremely tricky to calculate how quickly these mount up. Since the lengthy Supreme Court battle that ended in victory for the banks who were accused of unfair charges, many providers have taken steps to simplify unauthorised borrowing costs. The problem remains, however, that every bank has its own structure, so while both Halifax and Santander now use a daily charging model (you pay £5 per day), Barclays charges £22 for every five consecutive working days and HSBC customers pay a punitive £25 for getting into an unauthorised overdraft plus another £25 for every day it increases.

"There is a confusing array of charges used by the main banks and once you get into an unauthorised position it's easy to quickly run up a big bank charges bill if more payments go out of your account before you can pay in or your wages are due," says Andrew Hagger of Moneycomms.co.uk.

Even worse, some banks have simply shifted things along and started charging higher fees for agreed overdrafts – unauthorised overdrafts are broadly unchanged, but one year ago the average authorised overdraft was 15.77 per cent and today it has crept up to 16.09 per cent.

It will be a brave move if any bank does decide to charge customers a monthly fee for their standard current accounts, particularly while so many are still too confusing and expensive. The only account that charges a fee today (apart from packaged accounts) is Santander 123 at £2 per month, but this does offer an attractive credit interest rate ranging from 1 per cent on balances between £1,000 and £2,000, up to 3 per cent on £3,000 and £20,000, as well as up to 3 per cent cashback on utilities paid by direct debit. This also comes with a free arranged overdraft for the first four months, but after this you pay £1 per day, capped at 20 days a month.

Even if all of the banks do reduce fees and make overdraft charges simple and cheap, there is also the matter of credit balances to consider – huge sums of money are held in current accounts but many of the banks don't pay a penny for the pleasure of holding our salaries.

The worst-possible scenario would be current account holders routinely paying a monthly fee, while still enduring excessive charges, complex products, mis-selling of other financial products and poor customer service.

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