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Farewell to free banking

A new account out tomorrow could herald a return to charges for people in credit. Should we mourn, asks Anthony Bailey
Few things raise the hackles of the British public more than bank charges.

That is why Barclays' new Additions current account, available from tomorrow and carrying a monthly fee of pounds 5 even for those in credit, is unlikely to prove popular. The new account has been seen as heralding the end of free banking.

Yet properly structured bank charges could actually be good for you, claims one academic.

"I reckon that free banking not only could end but should end. This would eliminate cross-subsidies," says David Llewellyn, Professor of Money and Banking at Loughborough University. People who make fewer transactions that are currently free are subsidising those who make more transactions, particularly the more costly such as cheque processing.

In fact there is no such thing as free banking, adds Professor Llewellyn. It is just a question of how you pay. At the moment the consumer pays for so-called free banking in the form of a lower interest rate on his or her money.

"If you end free banking but pay a higher rate of interest to account holders then everybody could gain because there would be an incentive for consumers to economise on their use of the payments system," he says.

Different types of payment could carry different charges, as they do in many other countries. Then there would be a reason for people to go for the lowest cost. Account holders, for example, currently have a financial disincentive to use debit cards rather than cheques when shopping: with a Switch card or the like the money leaves your account immediately, while with cheques you have a few days' grace.

Theory apart, though, the end of free banking for customers in credit has been on the cards for a while.

When interest rates were at the high levels last seen in the early 1990s, the banks could more easily absorb the cost of running current accounts. The interest they could earn on lending out the money paid for the cost of running the accounts. They could even pay more than negligible interest (unlike now) on credit balances.

Break-even is said to have been when interest rates were at 8 per cent. But with the base rate at 6 per cent, it is probable that banks are not now making money on current accounts - even if they are making fat profits generally.

As a result, there is more pressure to introduce charges even for customers who are in credit. It is the fear of giving rivals an advantage that is holding them back. Furthermore, banks feel the need to improve their service and raise customer satisfaction levels before they can justify introducing new charges.

Arguably, however, banks are already increasing charges on free-if-in- credit accounts on the quiet - for example, for special requests such as confirming to whom a particular cheque was paid by sending the customer a photocopy of the original cheque. And some are now making more public moves away from free banking, even if not for all of their customers.

Barclays' Additions account could be the first tentative step in this world of new charges, if not of better interest rates. The key feature of the new account is a pounds 5 monthly charge even for customers in credit. For that pounds 5 you get "a range of value-added services, with a potential annual value of pounds 300".

But it is hard to believe that many people will be attracted, despite the bank's "extensive research into what customers require". The main perks are pounds 5,000 worth of free life insurance, discounted private medical cover for children, a free will-writing service and a pounds 100 fee- and interest- free overdraft. Additions also carries the same credit interest and overdraft charge rates as Barclays' existing free-if-in-credit account, which will continue to be available for new and existing customers.

NatWest says it plans a similar new account later in the year. A spokesman says: "The point we make is that it is all about customer choice, offering an alternative, not a replacement. The key will be the perceived value of the add-ons over and above the ordinary [free-if-in-credit] current account."

However, the prospect of the alternative becoming the replacement is there. Meanwhile, our table on page 18 should help people to compare their accounts with others.

Three useful rules are worth bearing in mind:

q First, the best account for you depends on how you use one - whether you tend to be overdrawn, or whether you stray into the red accidentally and occasionally despite good intentions.

q Second, if you are in the wrong account, take your allegiances elsewhere. Switching accounts can be a hassle. But until more people make the switch, the banks and building societies can rely on customer inertia not to force a better service.

q Third, if you incur charges after an accidental overdraft, do challenge them. You will often find that you can get a refund.

It is worth noting from the table that there is still a distinct difference between banks and building societies when it comes to charges.

While most current accounts give some (miserly) interest on low credit balances, the banks make a monthly charge if you go overdrawn. The building societies tend not to make monthly charges for authorised overdrafts.

When it comes to monthly charges on unauthorised overdrafts, all current accounts hit you hard. Against this, however, some accounts offer free overdrafts aimed at people who occasionally slip into the red by accident.

As well as the charges detailed in the table, look out for:

q charges to stop cheques - only Abbey National and the TSB do this for free;

q quoted charges for cheques that bounce also applying to standing orders and direct debits that have gone unpaid because you do not have the funds;

q a charge, which some banks impose, if you use a rival's cash machine or one outside a particular network;

q overdraft arrangement fees. Some banks still have the cheek to charge you for agreeing to lend you money at what could be described as exorbitant rates;

q a charge for "abuse" of your cards (yes, even in the 1990s there are shades of the moralistic bank manager in the language used). Abuse means using a cheque guarantee card when you have an unauthorised overdraft.

How bank charges stack up

1=credit interest; 2=authorised overdraft rate; 3=unauthorised overdraft rate; 4=monthly charge, authorised overdraft; 5=monthly charge, unauthorised overdraft; 6=free overdraft amount; 7=bounced cheque; 8=duplicate statement (usually cost per page)

Bank 1 2 3 4 5 6 7 8

Abbey National 1%+ 11.9% 29.5% nil pounds 12+pounds 7 nil pounds 25 nil

(bank account) per item

Barclays 0.3% 19.2% 29.8% pounds 5 pounds 15-pounds 30 pounds 15* pounds 25 nil

(bank account)

Co-op 0.12% 19.56% 32.92% pounds 8 pounds 10 pounds 250 for pounds 30 pounds 5

(current account) 3 days

First Direct 0.3% 14% to 24.8% nil pounds 35+ pounds 250 pounds 30 pounds 5

(cheque account) 17.4% pounds 7.50** (fee free)

Girobank (Keyway) 0.5%+ 12.5% 29.8% pounds 8 pounds 17 pounds 20 pounds 25 pounds 5

Halifax (Maxim) 0.5%+ 12.4% 26.5% nil pounds 10 nil pounds 15 pounds 5

Lloyds 0.2%+ 18.8% 26.8% pounds 8 pounds 8+ pounds 10 pounds 25 pounds 6

(Classic account) pounds 7***

Midland (Orchard) 0.2% 16% 24.6% pounds 7 pounds 17 nil pounds 25 pounds 5

Nationwide 0.5%+ 12.2% 28.3% nil pounds 10 pounds 20 pounds 25 pounds 6

(Flexaccount) (fee free)

NatWest 0.25% 18.9% 33.8% pounds 9 pounds 9+ nil pounds 27.50 pounds 5

(current account) pounds 3.50 a day

TSB 0.25% 18.8% 29.8% pounds 6 pounds 6+ nil pounds 17.50 pounds 5

(interest cheque a/c) pounds 3 a day

Woolwich (current a/c) 0.75%+ 9.5% 29.5% nil pounds 10 nil pounds 25 pounds 5

*Barclays lets you have an overdraft of any amount for two days; **First Direct charges pounds 7.50 each time an unauthorised overdraft increases; ***Lloyds charges pounds 7 each time an unauthorised overdraft increases by pounds 10 or more.