The current account is the workhorse of our finances. It takes payments in, meets our regular bills, gives us ten pound notes from 30,000 cash machines, and lets us check our finances online and move money around 24 hours a day. And to most people it seems as if they do not pay a penny for these services. But in fact current accounts cost us all a lot of money. In 2006 the banks made £8.3 billion from them. And half of that was from people who kept a positive balance in their account. The banks made £4.1 billion by paying us next to no interest on the money in our current account and lending that money out at a much higher rate. That cost current account customers almost £100 each in 2006. Even today new mortgage rates average around 5% while most current accounts pay 0.1% or less so there is still plenty of scope to borrow money from us for next to nothing and lend it back to us with a huge mark-up. In 2006 for every £100 credit in a current account the banks earned £4.27 a year from it but paid us just 47p a year to use it.
The high profits made from our current accounts are partly our own fault. We leave too much money languishing in them. The average balance was £1740 – money which could be in a savings account earning 3% or more.
The second biggest earner for the banks is fees and charges on unauthorised overdrafts – £2.6 billion in 2006. Last November the Supreme Court ruled that the Office of Fair Trading could not investigate if the price charged for overdrafts was ‘fair’. If the verdict had gone the other way then the banks would only have been able to charge us what it cost them to run an overdraft. That would have seen the end of the £25 letter saying ‘you are overdrawn’ and the £30 fee for bouncing a payment. But the Supreme Court’s surprise judgement left the banks free to charge what they like for these services. Campaigners were disappointed. But those who stay strictly in credit breathed a sigh of relief. There had been predictions that if the banks had lost in court they would have started charging us all a monthly fee for our basic banking services.
Monthly fees
In fact the banks are busy trying to do that anyway. Much of their marketing
budget now goes on promoting so-called ‘packaged’ accounts. Between 2006 and
2008 they more than quadrupled the amount spent on advertising them from under
£5 million to more than £20 million according to figures from the research
organisation Mintel. A survey in 2009 by the consumer magazine Which? found that
nearly one in four of its readers paid a fee for their current account. Today
the average fee for a packaged account is £142 a year or about £12 a month which
is double the average in 2006 when they brought the banks revenues of £560
million.
The banks insist that the fee is not for the current account itself but for the extras which come with it. Those goodies are mainly insurance and the three most commonly provided are travel, car breakdown, and mobile phone cover. Research by Which? found that these products can almost always be bought for considerably less than the fee charged by the banks. And many people do not need the insurance in the first place. Travel cover is really best bought individually depending on your age and travel habits. Breakdown insurance is, of course, only needed by those who drive a car and many of them will have it already. Mobile phones will normally be covered by home contents insurance.
There is little point in paying an inclusive fee for a packaged account if the insurance it buys is either not needed, duplicates cover you already have or could be bought more cheaply. In some cases these accounts may also give a higher rate of interest on any positive balance – though with restrictions and still far less than the bank earns in most cases – and some accounts include an interest free pre-authorised overdraft of £100 or so for those moments when you inadvertently dip a few pounds into the red. Both those services can be found free by picking the right current account in the first place.
A Financial Services Authority spokeswoman told Saga that the regulator is in the very early stages of looking at packaged current accounts because “they are a big growth area and there can be complexity for consumers.”
Overdrafts
Most people do not open their current account with the intention of going
overdrawn. But there cannot be many of us who have not dipped into the red at
some time due to difficult circumstances, bad timing, or a simple mistake.
Although most people are happy to pay what they see as a fair price for
borrowing money on demand – and sometimes without permission – the long-running
legal action over unapproved overdraft charges shows just how strongly people
feel about draconian charges for what they see as minor infringements of the
rules. One effect of the legal case was to make the banks clarify and, in some
cases, simplify the fees they charge customers who go overdrawn. That did not
necessarily make them cheaper. For example Halifax and Bank of Scotland now
charge £1 a day for agreed overdrafts up to £2500 and £2 a day for larger ones.
Unauthorised overdrafts are charged at £5 a day. No interest is charged on top.
The new charges, which began last December, mean that anyone who owes less than
about £1900 now pays more. Santander still has a more traditional offer with an
unauthorised overdraft costing £25 a month as well as £30 for each bounced
payment and interest of 28.7% on the debit balance. Though it does offer
customers a free overdraft up to a limit for the first year.
One important effect of the legal challenge to overdraft fees is that the banks do now have very different rules from each other and competition between them is slowly developing. So if you think you may need to a bit of unauthorised borrowing then pick the account that charges the least. Much better of course is to keep an eye on your money and make sure you never do slip into the red.
Changing current
accounts
Current accounts are seen as cash cows by the banks partly
because we are very reluctant to move our account to a rival. Each year only
about one person in 17 switches their bank account and of those who do a quarter
say they would not do it again and a third would not recommend it to friends.
One reason for our reluctance is the perceived difficulty of moving direct
debits and standing orders to the new bank and then informing employers, pension
providers, DWP, and relatives that payments have to be sent to the new account.
There may also be credit cards, a mortgage or insurance with the old bank and in
all cases a new account means remembering new PINs and learning new online
banking systems. At every stage something could go wrong and people naturally
fear that could cost them money as well as time and effort.
Under new agreements banks should make sure that switching from one bank to another is a quick and simple process. All direct debits and standing orders should be moved automatically within two or three weeks, though it is always wise to keep an eye on progress. Some – but not all – banks will also inform any organisations that pay in money regularly about the new account. And those which do not should supply a standard letter to send to payers. BACS, which is owned by the banks, recently published a Switching Guide to help customers through the process bacs.co.uk/Bacs/Consumers/AccountSwitching. There is also a Direct Debit Help Centre available online bacs.co.uk/Bacs/Consumers/DirectDebit. A helpline is open office hours on 0870 049 2717.
February 2010