Current accounts are not free to customers and a lack of competition between banks keeps costs high. Those are the key findings of a detailed report into personal current accounts by the Office of Fair Trading (OFT).

The report reveals that current accounts earn the banks a staggering £8.3 billion a year. And far from being ‘free’ each account costs the average customer £152 a year in charges and lost interest. The OFT reveals that current accounts generate more money each year for the banks than any other service – and almost as much as mortgages and credit cards together.

The banks make £4.1 billion a year by lending out the money in our current accounts but paying us almost no interest on it. And they make £3.1 billion from the charges and interest on overdrafts. The remaining billion pounds or so comes from fees for current accounts and miscellaneous charges.

None of this would matter if the banks were open and transparent about these costs. But the OFT says they are not. Director General of Fair Trading John Fingleton gave this analogy to the BBC

"It’s like going into a petrol station without being told how many litres of petrol you buy and not having much pricing on display. [If that happened] you wouldn’t have much competition among petrol stations."

Overdrafts
Overdraft charges are currently the subject of a major court case. In April the High Court found that they were governed by a law that says they have to be fair. The banks are appealing against that ruling – not, they insist, because they want them to be unfair. But because they want to be free to charge what they like for what they say is a service. While the appeal is decided – which could take a year or more – the courts have given the OFT permission to carry on assessing what it thinks fair overdraft charges would be if the banks do lose their appeal. Various studies in the past have suggested bouncing a payment should cost well under £5 instead of the £30 average currently charged.

It is not just the careless and feckless who pay these charges. The OFT found that that nearly a quarter of all current account holders paid at least one charge during the year and that customers who paid one overdraft fee were likely to end up paying six as they struggled to get back into credit. Research in July by MoneyNet found that a single overdrawn payment of £50 which could not be repaid within two weeks would incur a charge of between £25.10 (HSBC) and £165.36 (LloydsTSB Classic Plus). It also found that the average charge by nine High Street banks for a £200 unauthorised overdraft for five days would be £52.15.

Avoiding an overdraft is becoming harder as more companies demand payment by direct debit. That takes away the control form us of when payments are taken from our account or how much they are. With the banks earning £3.1 billion a year from overdraft charges, no wonder they like direct debits as much as the energy suppliers and local councils.

Fees
Although the banks make much of what they call ‘free banking’ there is a growing trend to charge us a fee for ‘premium’ current accounts. They typically cost about £130 a year but some cost as much as £300. These fees often buy very little and may include things you already have or do not need such as a breakdown service for a car or worldwide annual travel insurance. Some offer a better rate of interest. Barclays pays 2.96% on its two packaged accounts which cost £3 or £14 a month. But even with the cheaper account a basic rate taxpayer will need an average balance of £1520 simply to earn enough interest to cover the fee. Packaged accounts are best avoided.