Free banking: truth or myth

The argument over free banking appears set to rumble on, with industry experts claiming there are a number of hidden costs with bank accounts.

At the moment, the majority of current account holders don’t have to pay a fee to open a current account with a bank. However, there are a number of additional fees which get placed elsewhere for the account holder to absorb.

Interest rates remain at a record low of 0.5% and this is having a detrimental effect on the amount that banks can charge consumers. These interest rate charges would typically be placed on those who go overdrawn without permission or make certain transactions such as withdrawing cash overseas.

As customers take the hit in other ways, the concept of free banking has come into question. Andrew Bailey who is soon to be the chief regulator of the financial services industry, believes that free baking is a ‘dangerous myth’ as customers absorb additional extras without realising it, which has led to products being mis-sold, such as payment protection insurance.

Mr Bailey, who is currently an executive director at the Bank of England and will take up his new role in July, said: “I think that the reform of retail banking in this country cannot move ahead unless we tackle the issue of free in-credit banking, and have a much better sense of what we are paying for and how we are paying.”

“I worry also that this unclear picture may have encouraged the mis-selling of products that is now causing so much trouble,” he continued.

Free banking

The issue is complex as many are confused about what exactly they are being charged for.

Mike O’Connor is the Chief Executive of Consumer Focus, the consumer watchdog, and claims 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 said.

“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.”

Not many banks have opted to openly charge consumers the privilege of having a current account except one.  Virgin, who recently secured the best bits of the collapsed Northern Rock bank, has started charging customers £5 a month for a current account. However, this has been met with some hostility.

Free banking has a lot of positives and negatives. Those who remain in credit can, at the moment, enjoy the full benefits of banking without paying a charge. Undoubtedly, some will be outraged if they are then forced to pay to keep their account.

On the other hand, those who are consistently overdrawn face higher fees and charges. Paying a monthly fee could be significantly smaller than higher overdraft fees. If fees are introduced they may have to be kept reasonably low, so as not to drive away customers, especially vulnerable ones who rely on credit.


There is also a call for more transparency over fees and charges, as a number of customers who are unaware of what they are paying for are not able to shop around for the best deals. Hidden fees and charges make it almost impossible for customers to compare current deals and, as it stands, the overdrawn nation is paying millions in fees which could easily be avoided.

The Independent Commission on Banking released a report, the Vickers Report, in September suggesting that customers should have the amount of ‘interest foregone’ on their annual statements. This means that customers will know the price of having a current account rather than a savings account.

The report stated: “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.”

Compare current accounts

Free banking comes at a price and even though most accounts won’t charge consumers for an account, there are some additional fees.

Santander’s 123 current account, like most, charges customers for using their overdraft. At the moment it is 0% AER variable on an arranged overdraft, meaning there is no daily fee for the first four months. After the introductory period customers will have to pay £1 each day, which is capped to 20 days per month.

The current account is great for cashback on household bills as customers can benefit from 1% cashback on water and council bills, 2% cashback on gas and electricity and 3% on mobile, home, broadband and paid TV packages. This account also offers up to 3% interest on credit balances over £1,000.

Compare current accounts with Propertywide.

Posted by: WarrenWilson Categories: Finance Tags: , Comments Off on Free banking: truth or myth

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