'Free banking': Good thing or barrier to competition?


People on whether they would be happy to pay for more competitive banking

If you believe that there is no such thing as a free lunch, then you will certainly think the same is true of a current account from a bank.

The majority of customers do not pay a fee to their bank for the right to open and maintain a current account, but they are charged in other ways.

Interest rates are lower than the levels offered with savings accounts or official rate set by the Bank of England. Charges are levied for going overdrawn without permission or for making certain transactions.

Is this method of charging stifling competition and making it too confusing for customers who might consider shopping around for a bank account on the basis of price?

Or is it an acceptance that, unless they are offered added extras, customers have little appetite for paying a monthly fee to a bank for keeping their money safe?


The debate is not as clear-cut as you might think.

Start Quote

All individuals are different and the fact is that different current accounts are designed for different people”

End Quote Andy Gadd Lighthouse Group

Mike O'Connor is the chief executive of Consumer Focus, which has considerable power to act on behalf of customers. He says that the "perception" of free banking is not good for competition.

"It is great not to have to pay for a bank account, but is not necessarily good for the consumer in the bigger scheme of things," he says.

"Bank accounts are paid for by people who make mistakes and go overdrawn - they are often the least well-off and the least well-informed."

He says that no bank has totally broken ranks. That may not be that surprising, given the relatively hostile reaction to suggestions that Virgin Money may charge £5 a month for a current account.

The provider, which is attempting to gain a foothold in the High Street with the purchase of the good chunk of Northern Rock, says that customers will get a choice between a fee-charging account and a "free" account when it launches a current account offering in 2013.

Soiled reputation

It is often said that people in the UK are more likely to change their partner than they change their bank.

Cash machine A number of accounts offer extras for the busy customer - but for a fee

Even if you accept that people would shop around more if they could compare the "price" of an account, could banks really attempt to bring in a monthly fee for all current accounts?

Banks hardly have the best of reputations among the public at present. Add to that a whiff of suspicion about existing fee-charging accounts.

The City regulator, the Financial Services Authority (FSA) says that one in five UK adults has a packaged bank account.

These current accounts have a monthly fee because benefits such as insurance or ticket discounts are bolted on. Other common elements of the package are commission-free foreign currency, travel insurance, preferential overdraft deals, mobile phone insurance and breakdown assistance.

But the FSA wants greater checks to ensure customers are eligible and aware of the insurance elements of the bundle.

"We are concerned that it may be too easy at the moment for firms to sell customers something they do not understand or need," the FSA's Sheila Nicoll said in October.


So, if "free" banking is unfair, and fee-charging accounts offer a pathway to mis-selling, then what can be done to allow customers to shop around?

Recent incentives to switch

  • Cash-back for those switching from another bank
  • No charge for authorised overdrafts
  • Free multi-trip European travel insurance

The Independent Commission on Banking - the Vickers report - was published in September. It came up with a recommendation that customers' annual statements explain the amount of "interest foregone" by a customer or, in other words, the price of having a current account rather than a savings account.

Interest foregone is calculated by subtracting the amount of interest earned from a current account from the amount of interest that could be earned had the consumer put his or her money in an account which earns higher interest, or put some of that money in savings.

"Transparency must also be improved so that customers can identify the products that best suit their needs, forcing banks to offer the prices and services that customers seek," the report says.

That may still be somewhat opaque for the busy bank customer.

Andy Gadd, head of research at analysts the Lighthouse Group, says that price comparison websites can do the hard work for those looking to switch accounts to get the best deal.

"Comparing current accounts isn't necessarily easy but there are various comparison sites for those who want to review their banking facilities and find the best deal for their particular circumstances," he says.

"All individuals are different and the fact is that different current accounts are designed for different people - simply saying that all current accounts must charge a fee rather than paying interest will not change this and will actually disadvantage some."

'Firing customers'

While, it may disadvantage some customers, it could be good for the big banks, argues banking analyst Jonathan Charley.

Start Quote

Customers should consider whether, despite the initial tempting offers, these accounts offer value over time”

End Quote Kevin Mountford Moneysupermarket.com

"All of the big banks today have customers that they do not make any money from. These will be the types of customers that open a current account for their household money, for their book club, for their children, where the balances are low, transactions sizes are small and they have only one product," he says.

"The problem is that in today's banking environment it is very difficult for a bank to fire customers.

"However if customers were made to pay directly for the services that they use then it would be far easier for the banks to adjust their charges to either makes the low balance and low transaction value customers profitable or, better still for the banks, to encourage those customers to take their business elsewhere."

Meanwhile, the banks themselves are doing their best to attract the proactive customer by offering incentives to switch - with a bit of a frenzy of offers introduced in January.

Gone are the days or a free clipboard and pen. Now, for example, the Halifax is offering £100 to new customers at the start of the switching process, HSBC is offering 6% interest for 12 months in its current account "January sale", and the Co-operative Bank is dropping overdraft charges for existing customers for three months to keep them on-board.

But anyone tempted by such offers needs to stay on their toes.

"Customers should consider whether, despite the initial tempting offers, these accounts offer value over time," says Kevin Mountford, at moneysupermaket.com.

So, it seems, customers will have to stay engaged and informed if they want to pursue the best banking deal.

Instead of simply looking at a headline price - as they do in a store - the current account shopper needs to sit down with a calculator, a computer, and a considerable amount of time.

The question remains - will they bother, or will they go out for lunch instead?


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  • rate this

    Comment number 283.

    # 273
    Antipathy is not aimed at people working in retail banking. (aside from decision makers near top of food chain). That ought to be startlingly obvious...and I'm sure most bank employees appreciate that it's the senior management, investment magicians, and those attendant risk analysts/ auditors who colluded that are in the frame.

  • rate this

    Comment number 282.

    281. mbco1975

    No but many are paying 20% plus on loans and in the 30% on credit cards, plus the shops being charged 3% for accepting debit / credit cards, all funded by peoples cash in the system. By the way guilts have nothing to do with high street banking.

  • rate this

    Comment number 281.

    So many people here are stating that the banks are making interest on their deposits, so no need for them to charge.

    Virgin has said they'll charge £5 a month, so annually £60.

    One year Gilts have a yield of around 0.4%, so in order for them to make that you would need to comit to putting £15,000 cash in a non interest bearing account. Are many of you doing that?

  • rate this

    Comment number 280.

    My bank tried to offer me a premium account with a range of benefits no use to me (like a lounge at the O2 arena.) The clerk said "It's worth it just for the free travel insurance" When I said ""we're in our 60's, my wife is diabetic, and we like to go long haul, I take it we'd be covered for that" After a few "er-ums" I took that as a No then.

  • rate this

    Comment number 279.

    I have 2 bank accounts with the same bank, one has an interest rate of 0.1% but lots of benefits if you pay your salary in £1k min per month, the other pays 2,8% interest but no benefits. I have my salary paid into bank account 1, then transfer the same day to bank account 2. I get the benefits plus 2.8% interest, you just need to play them at their own game.

  • rate this

    Comment number 278.

    That's my money you are using. So no, you don't have the right to charge a fee to keep it. Just as you wouldn't have a right to borrow something of mine and then use it and charge me a fee for using it.

  • rate this

    Comment number 277.

    Cash is king.
    Payed in cash, spend cash. It isn't hard to get a better deal with cash than plastic.
    Banks charge companies who accept their cards, companies add this to their costs and pass it on to the buyer..
    A return to cash only would benefit everyone.
    Even barter beats banking.

  • rate this

    Comment number 276.

    My bank, the one with the black horse, has been good to me. I'm on a low wage but they gave me two small loans in the last three years. They gave the PPI cost back no quibble. I'm happy with them.

  • rate this

    Comment number 275.

    If the bank wants my salary every month and any surplus left over after, then they can pay for it. They use my cash along with others on a day to day basis to roll over on the money market, so I want my share. And should I want a loan I expect one at an interest rate that covers expenses not huge bonuses. Banks are a service - so serve.

  • rate this

    Comment number 274.

    I live in Canada - monthly fees for banking are common, with fees waived for maintaining a minimum balance in your current account (much like it used to be in the UK). Service is (by my experience) pretty good - maybe an example of you get what you pay for. And the banks haven't been bailed out by taxpayers!

  • rate this

    Comment number 273.

    265. steve
    "There are far too many Free Bankers,most of them should be in prison!"

    Traditionalists that we are, in this country we prefer to only imprison people convicted of an offence. Seriously, this anti-banking mentality is getting pathetic. The VAST majority of bank employees have dones absolutely nothing wrong and you do them a big disservice when you arbitrarily accuse them of crime.

  • rate this

    Comment number 272.

    Only those with no overdraft would call banking free. Current accounts with no overdrafts are the only things free. If you want a large amount of your own money moving elsewhere you have to pay for it even though the bank has been doing whatever they wanted with it until then. Until someone moves on interest rates there will be no competition among banks.

  • rate this

    Comment number 271.

    As they are earning interest on any money in my and other peoples accounts, at far more than they are giving us then we have already paid more than enough. On this money they are are also giving themselves huge bonuses and pay rises even although we own them. Blair/Brown did not stop the banks and now the Government is making a similar huge mistake in the railway project by not listening to us

  • rate this

    Comment number 270.

    I pay for 'Premier' services from my bak which is a complete waste of money. The still treat you with contempt and give terrible service. I just get a UK call centre instead of an Indian one.

    Charging for basic services is never going to work because, quite frankly,banks don't deliver any kind of acceptable service.

  • rate this

    Comment number 269.

    I'm happy with the status quo. I have about ten direct debits per month and never go in the red, although my balance only hovers around £1000. All the facilites of ATM's and DD is great value for my money. How much interest would I get on about £1000 if I had it invested? Yes, free banking is great for me and others if you live within your means. Those that don't deserve to be charged!

  • rate this

    Comment number 268.


    Although I pay no direct bank charges because I am always in credit, my current account earns less than 1% interest, but my money is being lent out to others for 6-10% by the bank, so they are making a profit on my money already.

    Plus my bank is 60% taxpayer owned, so I am paying more than enough through taxation for them.

  • rate this

    Comment number 267.

    If I transfer money or pay someone the money disappears from my account instantly online or at the cashpoint payment page but it takes days to get to them - the bank sit on money in transit like this and make more interest - think of the billions in transit to another account at anyone time and how much they juggle the interest and dubious investments they make!!

  • rate this

    Comment number 266.

    #264 It's a self funding service and we have no choice about how we are paid...oh, and competition, such as it is, is risible.

    In any case, as a tax payer,I've already paid for it!

  • rate this

    Comment number 265.

    There are far too many Free Bankers,most of them should be in prison!

  • rate this

    Comment number 264.

    Basic right? Why? it's a service - pay for it!


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