Tricky costs of current accounts

Last year, 500,000 people switched to other banks to pick up new interest rates. But high charges are the real grumble, says Paul Gosling

When the Halifax launched its higher interest rate on current accounts last year, it looked as if a revolution in banking was on its way. No more paltry interest payments, usually just 0.1 per cent with the Big Four banks. Nine months on, things are beginning to look different. Yes, Halifax and most of the higher interest-paying internet banks claim to be meeting their targets for new customers. But no, little impact is showing on the market share held by the Big Four, despite their failure to raise interest rates in response to tougher competition.

This week, Patricia Hewitt, Secretary of State for Trade and Industry, accepted a Competition Commission recommendation that Lloyds TSB should not be allowed to take over Abbey National. One reason was that it would reduce competition in the personal current account (PCA) market.

"PCAs are the core product in personal banking," says the Commission. "They also serve as a 'gateway' through which suppliers can sell other financial products, such as credit cards and personal loans, as a result of the relationship established through the PCA."

But the Commission found that "customers tend to see switching between banks as a difficult and unrewarding process, and the rate of switching is very low". Halifax pays 4 per cent on current accounts which are in credit monthly by £1,000 or more. "It's very successful," says spokes-man Shane O'Riordian. "In the first six weeks we attracted 150,000 customers. Last year across all banks 500,000 people switched current accounts. In less than two months we got almost one-third of last year's total switching balances."

The internet banks claim similar progress. Smile, a Co-operative Bank brand, offers 4.07 per cent on current accounts and £500 interest-free overdrafts, and charges only 9.9 per cent on authorised overdrafts. It has attracted more than 350,000 new customers, putting it on target to break even within two years.

Cahoot, owned by Abbey National, pays an even better 6.2 per cent on current accounts to new customers, or 7.1 per cent to existing clients. Flexible loans start at just 7 per cent. The bank has taken 160,000 new customers, which it says is in line with its targets. Cahoot claims it will remain a market leader on interest rates, but they are unlikely to stay this good indefinitely.

By the beginning of May, Halifax's call centre and internet bank IF had attracted 166,000 accounts. It says it is growing by 24 per cent monthly, but will not give up-to-date figures for total current accounts. It pays 4.5 per cent on these, or 5.5 per cent if customers also have savings accounts.

But with about 80 million current accounts in the UK, the newcomers and the Halifax have hardly dented the market. So why have more people not switched to pick up the better interest? Cahoot's spokeswoman, Hannah Chance, says: "People are a lot more willing to change their banks now. It has become so much easier, but there are still some questions of trust online." Mr O'Riordian says: "There is very little choice for people at present. Thirty-five per cent of people in the UK say they want to bank first and foremost in the high street."

Yet the major banks seem relaxed about Halifax's new initiative. "The Halifax offer seems to be very generous, but how many people keep sufficient in their current accounts for it to mean anything over a year?" says the Royal Bank of Scotland's spokeswoman, Caroline Mooney. She adds that the average balance held in current accounts is £700, meaning that most people would earn only £28 from Halifax's 4 per cent rate. "People expect to earn interest from their savings accounts," she says.

Barclays' spokeswoman agrees. "We found that customers don't actually cite the credit interest rates as the most important factor for their current accounts," she says. "They cite ease of access and the level of service they receive."

But the important question is whether this will start to change. IF's Heather Scott says that once it becomes easier for customers to move their accounts, many more will. "People like us are shaking up the marketplace," she says.

"The big banks are dragging their heels and making it difficult for customers to move. Once they get this right you will see more major players paying what they should on current accounts. They are getting more than 0.1 per cent when they put your money on overnight deposit and by anybody's standards that is unfair." Now a pilot scheme is making it easier to move accounts. The bank transfers standing orders and direct debits to a customer's new account, so the client does not have to notify an array of companies. The scheme will be extended to the whole of the banking industry from November.

Lloyds TSB has already ensured that a list of all direct debits and standing orders will be sent to a customer's new bank within three working days of being asked to do so. As a guarantee that the procedure will be effective, Lloyds TSB promises to pay the customer £50 if it fails to comply. This unilateral move was seen as part of its ultimately unsuccessful attempt to obtain official clearance for its bid for Abbey National. This week a report commissioned by the Treasury proposes further action to make the current account market more competitive.

The Banking Services Consumer Codes Review Group, chaired by DeAnne Julius, a former Bank of England monetary policy committee member, wants to place a duty on banks to complete bank transfers within five weeks, against up to 12 weeks at present. A bank would have to provide a full list of direct debits and standing orders to a customer's new bank within five working days of being asked to do so, or pay a £50 penalty.

The Julius report calls for clearer information to customers, saying account holders are often confused. An annual statement would have to explain interest rates and payments, overdraft charges, plus details of any charges and how they are calculated. Similar requirements would apply to current and savings accounts, credit cards and personal loans.

The key question is whether Julius's recommendations will be sufficient to generate a genuinely competitive market in current accounts. The Co-operative Bank has just asked people whether they were more likely to get divorced than change banks, and a staggering 70 per cent agreed. But the Halifax found that 60 per cent would be happy to move banks to get better interest rates on current accounts if it were easier to do so.

Perhaps more significantly, Flemings Premier Banking found that less than half of high street bank customers were satisfied with the way their current account was managed. The biggest complaint was excessive bank charges, rather than low rates of interest.