After pop, planes and cola, Branson takes on the banks

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Richard Branson yesterday launched one of his most ambitious assaults yet on the financial establishment, announcing details of a `revolutionary' one-stop bank designed to let people run all their financial affairs from a single account. Tom Stevenson, financial editor, examines the pros and cons of the billionaire entrepreneur's latest venture.

Virgin Direct, Richard Branson's financial services company, has teamed up with Royal Bank of Scotland to take on the powerful high street banks in their own backyard - savings and loans. The company claimed yesterday that a new all-in account, combining borrowings and savings, could save people tens of thousands of pounds during their lifetimes.

The new service, Virgin One, allows people to run all their finances - from buying a house to paying bills, running a current account and saving for a rainy day - using just one account. Aimed at busy people with neither the time nor the inclination to shop around for best-buy financial products, it is being marketed as a one-stop shop for personal finances.

Mr Branson said yesterday: "Banking is inherently a very straightforward business: it astonishes me that it has been allowed to become so complicated. The launch of Virgin One should provide a breath of fresh air - people will look back some day and wonder why banking wasn't always done this way."

Virgin One differs from other accounts by bundling up most of a customer's financial affairs into one package, offsetting positive assets such as deposit account savings against liabilities such as a mortgage and car loans, to give a net, negative balance attracting a single rate of interest.

A customer with a pounds 100,000 mortgage, pounds 5,000 car loan and pounds 10,000 of savings might therefore take out a pounds 100,000 borrowing facility with Virgin One. That would be used to repay net liabilities of pounds 95,000 and leave pounds 5,000 of available spare cash.

According to Virgin, because a single variable interest rate would be payable on the whole loan - at present 8.2 per cent - the customer would receive a higher interest rate on savings than available elsewhere and pay lower interest charges on the non-mortgage part of the debt than the high rates usually charged for unsecured loans and credit card borrowings.

Virgin will insist that account holders pay their salary into the account. Because that is used immediately to offset mortgage debt, it earns an effective rate of interest of 8.2 per cent until it is spent. There is no tax to pay on savings, because they are always offset by borrowings and the account, which has a lower limit of pounds 50,000 debt, is always in the red.

Virgin said the flexibility of the account would allow customers to pay their mortgages off more quickly than a traditional 25-year fixed-term home loan easily allows, potentially saving thousands of pounds over the life of a loan.

Despite the fanfare, the Virgin account received muted applause from personal finance experts who pointed out that most people needed the external discipline imposed by a direct debit payment to pay off their mortgage that left them with an amount each month that they knew they could safely spend.

Running the whole range of financial affairs from one account, critics added, meant many customers would simply spend until they reached their agreed limit, which could be as high as the value of their home. Anyone who failed to plan ahead adequately could find themselves reaching retirement with a heavy debt and only one asset with which to repay it - their house.

Other critics pointed out that anyone with a large mortgage compared to their other loans or savings would be better off shopping around for a cheaper home loan. A 1 per cent saving on a large mortgage - for example, by taking out one of the many fixed-rate mortgages now on offer - would more than offset the benefits of the other interest savings.

Virgin Direct was launched in early 1995 and has so far specialised in long-term savings products such as personal equity plans and pensions, and life insurance. Its move into banking represents the latest threat to traditional high street banks, which are already reeling from assaults by retailers such as Sainsbury and Tesco and a growing number of insurance companies.

The new 24-hour telephone-based Virgin One account will be available to Virgin Direct's 200,000 existing customers from 1 November and will open to the general public next year.