The British people's relationship with the banking industry has taken a turn for the worst over the past 12 months. First the banking charges furore, and then the credit crunch, have left customers with little faith in the system.
Nevertheless, with the exception of those who are willing to stash all their money under the mattress, everyone needs to put their faith in at least one bank. It's now all but impossible to survive without a current account – and for those who are willing to try, there will be charges to pay for not using direct debits to pay bills, and fees for cashing their monthly pay cheque.
But for the savvy financial consumer, there's no need to let the banks get the better of you. For those who tread carefully, pick the right provider, and are sure to scrutinise the small print, the UK banking system still presents very good value. In the US, as in many continental European countries, most banks levy monthly charges just to run your account, or charge fees for even the most simple transactions, such as depositing a cheque.
The good news is that banking remains very competitive in the UK. If you're unhappy, it's easier than you think – not to mention cost-free – to switch. Here are some of the things worth considering before you make up your mind:
Is my bank financially secure?
The Northern Rock crisis over the last week has demonstrated just how fragile the entire banking system can be when trust breaks down – especially in the midst of a credit crisis. Banks put their trust in you to make your mortgage or loan payments each month, just as you put your faith in them to pay interest on your savings and give you access to your money when you want it. When consumers lose that trust and run for their money, it can quickly put a bank the size of Northern Rock in real danger.
Ordinarily, a bank facing a crisis of confidence could turn to the money markets to borrow what it needed. However, the crisis of the past few weeks has meant that credit is harder to come by – especially for banks such as Northern Rock, which has the majority of its business in mortgages.
But the credit crunch is a short-term phenomenon. It is almost inconceivable that the very largest banks – such as HSBC, Lloyds TSB, Barclays, Natwest, Halifax or Abbey – could ever find themselves in the same situation as Northern Rock. These are a part of global companies, with well-diversified businesses. While their profits will surely be hit if the credit crisis continues, the chances of them ever having to call on a central bank for significant emergency support are very small.
If that is still little comfort, it's worth noting that the Government's move to back Northern Rock shows that it is not willing to let an otherwise good-quality bank go bust, simply due to short-term market conditions. So when choosing where to open a current account, or where to put your savings, you should not need to worry about the financial security of the institution before you jump in. All UK banks and savings providers are heavily regulated, and must meet strict solvency requirements to keep their doors open.
Are the charges reasonable?
Many banks have been adjusting their charges over the past few months after being taken to court by thousands of their customers. Unfortunately, most bank charging structures are just as complex as they once were – although most banks are now at least applying their fees with a little more common sense.
"People who make smaller slip-ups, and only stay over their limit for a day or two, tend to get slightly better treatment now," says Lisa Taylor of Moneyfacts, the comparison service. "However, all the banks now have very different charging structures and are calling their charges different things, which makes it much less transparent and harder for the consumer to understand."
Alliance & Leicester will become the latest to unveil an overhaul of its charges today, scrapping interest altogether on its overdraft facilities – both authorised and unauthorised – and replacing it with daily fees. Currently, it charges a very reasonable interest rate of around 6 per cent on its authorised overdrafts, and hits customers with fees of £25 if they bust their limit, and a further £34 if the bank chooses to bounce a withdrawal on your account. Under its new system, which comes into force towards the end of next month, you'll be charged 50p a day for using your authorised overdraft – no matter how much you are overdrawn – and £5 a day if you go beyond your limit. The £34 bounce fee will be reduced to £25.
For people who run relatively small overdrafts, this will work out poor value compared to paying interest equivalent to just 6 per cent a year.
Lloyds TSB announced similar changes to its charges earlier this month. However, it will continue to charge interest of up to 19.3 per cent on authorised overdrafts, while charging as much as £20 a day on unauthorised overdrafts of £100 or more. Barclays, Natwest and Halifax also all have relatively high charges for busting your overdraft limit, in the region of £30 a time, and £30 or more for a returned item.
Of the large banks, only HSBC has a relatively fair approach. It does not charge customers anything if they don't exceed their limit more than once every six months. After that, the charges are staggered to ensure that smaller indiscretions are penalised with smaller charges. Abbey introduced a similar, proportional charging structure a few weeks ago. However, it also hits customers with a hefty monthly fee on top of the more proportional "instant overdraft request fee". This means that it is still one of the most expensive banks on the high street.
Nationwide, the country's biggest building society, is slightly more reasonable on fees. It charges you just £20 a month if you go into your unauthorised overdraft limit, and charges nothing for returned cheques. It has a useful tool allowing you to compare its current accounts with other banks on its website (www.nationwide.co.uk/current_account).
Can I get an interest-free overdraft?
Although all the major banks offer interest-free overdrafts for students and new graduates, it's much harder to secure a 0 per cent deal once you've been at work for a few years. Alliance & Leicester offer interest-free overdrafts to new customers for the first 12 months. However, First Direct will be the only bank to offer a permanent interest-free overdraft – of £250 – when it overhauls its current-account proposition in November. Halifax, Norwich & Peterborough Building Society, Yorkshire Bank and Nationwide all charge below 10 per cent a year on agreed overdrafts on some of their accounts. But most of the bigger banks charge closer to 20 per cent.
Do I get interest on my current account?
First Direct's decision to introduce an interest-free overdraft has come at the expense of its policy to pay interest on current account balances. If you are looking for high interest on your current account, Abbey offers the best deal, currently paying 8 per cent, while Alliance & Leicester pays 6.31 per cent. However, these are only for the first year, and only apply on balances of up to £2,500. Halifax pays permanent interest of 6.17 per cent, but again only on balances up to £2,500.
Beware also that you must pay a minimum amount into your account each month to qualify for credit interest – £500 in the case of A&L, and £1,000 in the case of Halifax and Abbey. Nationwide and Lloyds also both pay over 4 per cent.
Before you get too carried away chasing interest on your current account, it's worth checking to see what it's actually worth to you. Most people have their largest outgoings taken from their account within the first few days of having their salary paid – so your average monthly balance may not be that much. In most cases, the benefit will amount to less than £40 a year. Especially if you're the kind of person who tends to slip into the red frequently, it likely makes more sense to search around for a bank with a more lenient overdraft charging policy.
"The critical thing to remember is not to get seduced purely by rate or any other incentive," says Kevin Mountford of Moneysupermarket.com, the comparison website. "It's important to look at the product in its entirety."
Should I go for a fee-paying account?
Most of the major banks now offer accounts with enhanced interest rates, overdrafts, and many other incentives for customers who are willing to pay a monthly fee. However, it's worth calculating just how much the actual benefit of these accounts is before you sign up.
For example, although you might get free AA cover with Lloyds TSB's packaged accounts, worth £69 a year, this isn't any use if you don't have a car. Furthermore, you may find you can get a better deal on breakdown cover by buying it alongside your car insurance.
To compare accounts – both with or without fees – visit comparison sites, such as Moneysupermarket.com or Uswitch.com.
'It was easier than I thought'
Sara Bradshaw, a 37-year-old support worker from Nottingham, decided to switch her current account this summer, after banking with Lloyds TSB for more than 20 years.
Having been moved by Lloyds to a premium account with a monthly fee, she felt she was not getting value for money from her bank.
"It started off at £5 a month, then it increased to £7.50, and I had a platinum account with them too, that was costing me another £12.50 a month," she says.
"I was paying out all this money before I'd even touched my salary each month. Although they justify it by saying that you get free AA cover, travel insurance and loads of discounts, half of the stuff wasn't any use to me."
Sara decided to move to Alliance & Leicester on the recommendation of some friends, and was impressed that she could go through the entire switching process online and by post, without having to make a visit into one of their branches – or even having to visit Lloyds to shut down her account.
"I'm a single mum with two children and a full-time job, so my time is really precious.
"It was great that I could do it all over the internet, and they moved all my direct debits and standing orders for me, and kept me informed every step of the way."
Sara says she was also attracted to A&L because they offer good interest on their current accounts, and had competitive savings accounts too.
"It was much easier than I thought it would be – they did all the work for me," she adds.Reuse content