'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
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Sales Executive / Foreign Exchange Dealer - OTE £40,000+

    £16000 - £40000 per annum: Recruitment Genius: A Foreign Exchange Dealer is re...

    SThree: Experienced Recruitment Consultant

    £20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...

    Recruitment Genius: Collections Agent

    £14000 - £16000 per annum: Recruitment Genius: This company was established in...

    Day In a Page

    Refugee crisis: David Cameron lowered the flag for the dead king of Saudi Arabia - will he do the same honour for little Aylan Kurdi?

    Cameron lowered the flag for the dead king of Saudi Arabia...

    But will he do the same honour for little Aylan Kurdi, asks Robert Fisk
    Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

    Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

    Humanity must be at the heart of politics, says Jeremy Corbyn
    Joe Biden's 'tease tour': Could the US Vice-President be testing the water for a presidential run?

    Joe Biden's 'tease tour'

    Could the US Vice-President be testing the water for a presidential run?
    Britain's 24-hour culture: With the 'leisured society' a distant dream we're working longer and less regular hours than ever

    Britain's 24-hour culture

    With the 'leisured society' a distant dream we're working longer and less regular hours than ever
    Diplomacy board game: Treachery is the way to win - which makes it just like the real thing

    The addictive nature of Diplomacy

    Bullying, betrayal, aggression – it may be just a board game, but the family that plays Diplomacy may never look at each other in the same way again
    Lady Chatterley's Lover: Racy underwear for fans of DH Lawrence's equally racy tome

    Fashion: Ooh, Lady Chatterley!

    Take inspiration from DH Lawrence's racy tome with equally racy underwear
    8 best children's clocks

    Tick-tock: 8 best children's clocks

    Whether you’re teaching them to tell the time or putting the finishing touches to a nursery, there’s a ticker for that
    Charlie Austin: Queens Park Rangers striker says ‘If the move is not right, I’m not going’

    Charlie Austin: ‘If the move is not right, I’m not going’

    After hitting 18 goals in the Premier League last season, the QPR striker was the great non-deal of transfer deadline day. But he says he'd preferred another shot at promotion
    Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

    How Isis profits from destruction of antiquities

    Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
    Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

    'If we lose touch we’ll end up with two decades of the Tories'

    In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
    Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

    The Arab Spring reversed

    Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
    King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

    Academic claims King Arthur was real - and reveals where he lived

    Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
    Who is Oliver Bonas and how has he captured middle-class hearts?

    Who is Oliver Bonas?

    It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
    Earth has 'lost more than half its trees' since humans first started cutting them down

    Axe-wielding Man fells half the world’s trees – leaving us just 422 each

    However, the number of trees may be eight times higher than previously thought
    60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

    60 years of Scalextric

    Model cars are now stuffed with as much tech as real ones