Santander takes pole position in charges battle

The Spanish-owned bank has stolen a march on British rivals by launch a fee-free current account ahead of next week's charges court case. Simon Read reports
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The Independent Online

Current accounts are set to get much more competitive. Santander – owner of Abbey and Alliance & Leicester – this week announced plans to launch a fee-free account in January. Meanwhile the Supreme Court will announce its decision on the long-running bank charges case next Wednesday and is expected to support the Office of Fair Trading's right to challenge expensive charges.

The timing of Santander's announcement on Thursday was clearly no coincidence, but the bank has obviously been working on its new Zero current account for some months. It will be the first new product from the rebranded Abbey and Bradford & Bingley when it changes its name to Santander on January 11. As such, the Spanish-owned firm has a lot at stake. The name change is the bank's chance to really set out its intentions and establish the name as a new positive force in British banking.

Antonio Horta-Osorio, chief executive of Santander UK, says the bank is grabbing the chance to differentiate itself from existing high-street bank brands, which is understandable given the amount of damage the banks have done to themselves in the last year or so. "Santander is uniquely placed among UK banks to change the way it does business, and our new approach is one based on simplicity: the more business you do with us, the more we will offer in return," he says.

The Zero account looks set to establish Santander among the British public from the off. Its terms look attractive with no overdraft charges or fees for bounced cheques. Instead, if you go into the red you'll be charged interest. Even then the interest is only 12.9 per cent, which will make it the cheapest overdraft on the market.

There will be no ATM charges, foreign exchange fees or debit card charges with the account and, if you deposit at least £1,000 each month, you'll get interest of 6 per cent on your credit balance. There really is no other current account as good around at the moment. While there's no doubt that rival banks have been working on their own new current accounts against the background of the bank charges row, it's unlikely that Santander's new proposition will be bettered.

But there's one big problem – you probably won't be able to apply for the account. It will only be offered to Santander's mortgage holders, of which there are currently 2 million, with another half a million Alliance & Leicester borrowers being offered the deal when A&L changes its name to Santander in autumn 2010.

The move is designed to increase Santander's mortgage market share as it hopes the current account will prove attractive enough to persuade borrowers to make the switch. As such, it's just the latest move in the trend of the last few years to offer attractive deals only conditionally, the condition being that you sign up to a less-attractive related product. The trend has actually been led in the current account market by the likes of Alliance & Leicester and Abbey which have offered great regular savings rates, but only to people who sign up for a current account.

The principle is fine, as long as people understand what they're getting and weigh up the benefits of the headline deal against the financial product they are actually buying as a consequence. On that basis, how does the Zero account stack up?

To judge that, you need to examine how Abbey's current mortgage offerings compare against the market. "While Abbey offers some very competitive fixed-rate and tracker mortgage deals at the moment, its 'bread and butter' standard variable rate customers are currently paying a far less competitive 4.24 per cent," says Justin Modray, director of Candidmoney.com. "Many of Abbey's customers could save thousands of pounds by moving to a better rate elsewhere, which will more than outweigh any bank charges they're likely to incur on their current accounts over the life of their mortgage."

For example, an Abbey borrower with a £150,000 standard variable rate mortgage repayable over 20 years would end up paying £72,732 in interest at the current 4.24 per cent rate. But switching to a First Direct base-rate tracker mortgage at 2.79 per cent would reduce interest charges to £45,892. Over 20 years that adds up to a saving of £25,841, which is clearly much more than even the most expensive bank would dare charge customers who go overdrawn.

And, let's face it, charges will be slashed shortly after the Office of Fair Trading pursues its case against the banks, assuming the Supreme Court rules in its favour next Wednesday. It's reasonable to assume that the days of excessive charges are behind us and, while few accounts will offer fee-free banking, penalty charges will fall to a much more reasonable level after the OFT finishes its investigation.

Other financial commentators welcomed Santander's move, while warning of the dangers of being persuaded to switch mortgages on the basis of what could effectively be paltry savings on a current account. "If you manage your money effectively, your current account shouldn't cost much more than a few pounds a year, if anything at all," says Kevin Mountford, head of banking at moneysupermarket.com.

"Consumers should make sure they are not swayed to switching larger financial products, such as their mortgage, on the basis of a current account deal. This is not a sufficient saving to justify switching a mortgage where you could face additional fees," he adds.

He advises people choosing a current account to consider how they expect to use the account. "That will help help them determine which product has the features and facilities they need," says Mountford. However, he praised Santander for its move. "It really is great to see innovation in the banking market, which has been somewhat devoid of new ideas whilst the OFT case regarding unfair charges has been hanging over the industry.

"Santander has clearly taken heed of broad concerns around charging structures and looked to wipe them all away in one fell swoop. The lack of any fees whatsoever means that users of this account will see a string of benefits, including an option to go overdrawn without incurring prohibitive fees, free use of the card abroad and no banker's draft fees."

Pierre Williams, head of research at Moneyexpert.com says Santander's move will lead to similar deals from its rivals. said: "Santander is turning up the pressure in the current account market and this could be the shape of things to come in banking. What really stands out is the absence of charges on payments that bounce. We still have around 95 per cent of providers making punitive charges, often as high as £35 for the likes of bounced cheques or unpaid direct debits.

"So it's great to see an account offering a degree of simplicity when it comes to interest and charges," says Williams. "Bank charges remain a controversial area and it's likely that we'll see other providers moving in a similar direction."

Others could make moves as soon as next week, depending on the outcome of the bank charges test case. Banks have already paid out some £559m in refunds to customers who reclaimed the fees before the test case began more than a year ago. Next week's ruling could open the floodgates for millions more to seek cash back from their banks. It's estimated some 12 million people have faced overdraft charges in the last few years.

Charges case: 'Political intervention needed'

The Supreme Court will give its judgement on the bank charges test case next Wednesday 25 November. However, assuming that it finds in favour of the OFT, that could just be the beginning of months more of legal wrangling before the situation is resolved.

"The case decides whether fairness rules apply to bank charges, not whether they're actually are unfair," points out Martyn Lewis, of the Moneysaving-expert website.

"That's for the Office of Fair Trading to do and it has already provisionally said it thinks they are. Yet there's currently nothing stopping the banks challenging that in court and dragging the whole thing on for years more."

The hope is that the banks will accept the OFT's argument and reduce charges to a reasonable level while paying out to the millions who have been overcharged in the past.

But Lewis warns that the banks may need to be forced to play fair. "The real hope of a quick solution is for political intervention after this result, to get a negotiated settlement."

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