'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.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

    Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

    £50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

    Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

    £13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

    Ashdown Group: Training Programme Manager - City, London

    £40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

    Day In a Page

    Where the spooks get their coffee fix: The busiest Starbucks in the US is also the most secretive

    The secret CIA Starbucks

    The coffee shop is deep inside the agency's forested Virginia compound
    Revealed: How the Establishment closed ranks over fallout from Loch Ness Monster 'sighting'

    How the Establishment closed ranks over fallout from Nessie 'sighting'

    The Natural History Museum's chief scientist was dismissed for declaring he had found the monster
    One million Britons using food banks, according to Trussell Trust

    One million Britons using food banks

    Huge surge in number of families dependent on emergency food aid
    Excavation at Italian cafe to fix rising damp unearths 2,500 years of history in 3,000 amazing objects

    2,500 years of history in 3,000 amazing objects

    Excavation at Italian cafe to fix rising damp unearths trove
    The Hubble Space Telescope's amazing journey, 25 years on

    The Hubble Space Telescope's amazing journey 25 years on

    The space telescope was seen as a costly flop on its first release
    Did Conservative peer Lord Ashcroft quit the House of Lords to become a non-dom?

    Did Lord Ashcroft quit the House of Lords to become a non-dom?

    A document seen by The Independent shows that a week after he resigned from the Lords he sold 350,000 shares in an American company - netting him $11.2m
    Apple's ethnic emojis are being used to make racist comments on social media

    Ethnic emojis used in racist comments

    They were intended to promote harmony, but have achieved the opposite
    Sir Kenneth Branagh interview: 'My bones are in the theatre'

    Sir Kenneth Branagh: 'My bones are in the theatre'

    The actor-turned-director’s new company will stage five plays from October – including works by Shakespeare and John Osborne
    The sloth is now the face (and furry body) of three big advertising campaigns

    The sloth is the face of three ad campaigns

    Priya Elan discovers why slow and sleepy wins the race for brands in need of a new image
    How to run a restaurant: As two newbies discovered, there's more to it than good food

    How to run a restaurant

    As two newbies discovered, there's more to it than good food
    Record Store Day: Remembering an era when buying and selling discs were labours of love

    Record Store Day: The vinyl countdown

    For Lois Pryce, working in a record shop was a dream job - until the bean counters ruined it
    Usher, Mary J Blige and Will.i.am to give free concert as part of the Global Poverty Project

    Mary J Blige and Will.i.am to give free concert

    The concert in Washington is part of the Global Citizen project, which aims to encourage young people to donate to charity
    10 best tote bags

    Accessorise with a stylish shopper this spring: 10 best tote bags

    We find carriers with room for all your essentials (and a bit more)
    Paul Scholes column: I hear Manchester City are closing on Pep Guardiola for next summer – but I'd also love to see Jürgen Klopp managing in England

    Paul Scholes column

    I hear Manchester City are closing on Pep Guardiola for next summer – but I'd also love to see Jürgen Klopp managing in England
    Jessica Ennis-Hill: 'I just want to give it my best shot'

    Jessica Ennis-Hill: 'I just want to give it my best shot'

    The heptathlete has gone from the toast of the nation to being a sleep-deprived mum - but she’s ready to compete again. She just doesn't know how well she'll do...