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Last Updated: Tuesday, 14 November 2006, 23:46 GMT
End in sight for 'free' current accounts?
By Philip Middleton
Partner at Ernst & Young

Phil Middleton
Current accounts could be set for reform, Phil Middleton says

First Direct has started to impose a charge on its current account customers, who deposit less than 1,500 a month.

An expert asks is this the beginning of the end of free banking?

Like red telephone boxes and policemen on bicycles, the "free" bank current account is a peculiarly British institution which may soon become part of our nostalgic folk memory.

That is not because there is any massive demand for change, but potentially as an unintended consequence of other changes which are affecting retail financial services in the UK.

At the moment, broadly speaking, most people with bank accounts - upwards of 90% of the population - have a current account which is "free if in credit".

Provided the account holder doesn't go into the red, then all of the normal operations of the account - moving money in and out, cheques, standing orders, direct debits, ATM withdrawals - come free of charge.

And that is irrespective of the volume of transactions or whether they are undertaken remotely or in person at a branch.

An account will also usually come with other benefits such as a debit card and borrowing facilities.

Elsewhere in the world, customers pay for current account services either on a flat-fee basis or under a "pay as you go" system.

There may be a menu of prices for each and every transaction, so for example you might have to pay $1 every time you write a cheque.

Profit margins

So how come the British consumer gets such a good deal?

People using a cash machine
You are still statistically more likely to change your spouse than you are your bank account

It is partly because most UK banks pay relatively little interest on money sitting in a current account - perhaps 0.1% at a time when the Bank of England base rate is 50 times more at 5%.

So there is a profit margin there which contributes to the cost of running the account.

Multiplied by millions of customers it equates to a substantial amount of money.

But for the individual consumer that is not necessarily a problem - you can shop around quite easily for better deals.

For the average consumer the difference between having the worst-paying current account and the best one is roughly equivalent to the price of a medium latte each month.

Hardly worth getting worked up about, is it? And few of us do.

Although consumers are getting pickier, you are still statistically more likely to change your spouse than you are your bank account.

That means we stay with our banks for a long time and give them the opportunity to sell us a broad range of services.


A cherished and uniquely British component is the oxymoronic "unauthorised overdraft" which foreigners find completely baffling.

In many countries, it is a physical impossibility to have one - the bank will simply bounce your cheque.

UK banks... may well conclude that the current "free if in credit" model has had its day

And in some countries it is a criminal offence on the grounds that spending money you don't have without prior permission equates to theft.

In the UK by contrast, many people see the "unauthorised" overdraft as an attractive feature of the current account and often an essential means of getting from one month to another with finances roughly intact.

You do, however, pay heavily for the privilege.

A hefty interest rate normally applies, accompanied by various, not insignificant, "penalty" charges, although the scope and scale of these are currently under review by the Office of Fair Trading.


Successive requirements to treat customers fairly has made it progressively difficult for banks to bundle different policies and services together.

The selling of pension and endowment policies has been made much more difficult.

Banks have recently been told to cut their default fees on credit cards.

And the selling of payment protection insurance will be probably be restricted soon.

In this climate of greater transparency, banks are being forced to eliminate any form of cross subsidy.

The result is that customers will be forced to pay the real cost of some of the services they currently get on the cheap.

The banks may well conclude that the current "free if in credit" model has had its day.

If that happens, then the current "one size fits all" approach is likely to be replaced with a whole palette of different current accounts with different features and a range of pricing options, such as a monthly fee or "pay as you go".

This will add up to a lot more choice for consumers and a great deal more competition amongst banks, although some customers are likely to complain about a superfluity of choice and increased complexity.

Probably within the next 18 months or so one of the major High Street banks will make the first move.

Once one takes the plunge, expect very rapid change in the whole sector as another uniquely British institution bites the dust.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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